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Whether RBI is entitled to direct disclosure of confidential and sensitive information pertaining to customers’ affairs etc under the Right to Information Act, 2005?

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MASTI

IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/ APPELLATE JURISDICTION
I.A. No.68597 of 2021 AND I.A. No. 51632 of 2022
IN &
WRIT PETITION (CIVIL) NO.1159 OF 2019

HDFC BANK LTD. & ORS. …PETITIONER (S)

VERSUS
UNION OF INDIA & ORS. …RESPONDENT (S)

WITH
I.A. No.54521 of 2022
IN &
WRIT PETITION (CIVIL) NO.683 OF 2021

WRIT PETITION (CIVIL) NO. 1469 OF 2019

WRIT PETITION (CIVIL) NO.690 OF 2021

WRIT PETITION (CIVIL) NO.709 OF 2021

WRIT PETITION (CIVIL) NO.768 OF 2021

WRIT PETITION (CIVIL) NO.765 OF 2021

SPECIAL LEAVE PETITION (CIVIL) NO.14343 OF 2022

ORDER
B.R. GAVAI, J.

1. For the reasons stated in I.A. No.68597 of 2021 in Writ Petition (Civil) No.1159 of 2019 for Impleadment, the same is allowed.

2. This batch of writ petitions has been filed by various Banks including private banks, inter alia, challenging the action of the respondent­ Reserve Bank of India (hereinafter referred to as “RBI”) in directing disclosure of confidential and sensitive information pertaining to their affairs, their employees and their customers under the Right to Information Act, 2005 (hereinafter referred to as “the RTI Act”), which, in their submission, is otherwise exempt under Section 8 thereof.

3. We are treating Writ Petition (Civil) No. 1159 of 2019 as the lead matter.

4. Interlocutory Applications being I.A. No. 51632 of 2022 in Writ Petition (Civil) No.1159 of 2019 and I.A. No.54521 of 2022 in Writ Petition (Civil) No.683 of 2021 have been filed by the applicant­Girish Mittal, thereby seeking dismissal of the present writ petitions.

5. It is the contention of the applicant that the present writ petitions, in effect, are challenging the final judgment and order dated 16th December 2015, passed by this Court in the case of Reserve Bank of India vs. Jayantilal N. Mistry 1 and hence the same is not maintainable and is liable to be dismissed.

6. We have heard Mr. Prashant Bhushan, learned counsel appearing on behalf of the applicant­Girish Mittal and Mr. Rakesh Dwivedi, Mr. Mukul Rohatgi, Mr. Dushyant Dave, Mr. Jaideep Gupta, and Mr. K.V. Viswanathan, learned Senior Counsels and Mr. Divyanshu Sahay, learned counsel appearing on behalf of the writ petitioners/Banks.

7. Mr. Prashant Bhushan, learned counsel, submitted that the issue which is sought to be raised in the present writ petitions has already been put to rest by a judgment of this court in the case of Jayantilal N. Mistry (supra). It is further 1 (2016) 3 SCC 525 submitted that this Court, in the case of Girish Mittal vs. Parvati V. Sundaram and another2, while holding that the RBI has committed contempt of this Court by exempting disclosure of material that was directed to be given by this Court, has also held that the RBI was duty bound to furnish all information relating to inspection reports and other materials.

8. Mr. Prashant Bhushan relies on the judgment of a Nine­ Judge Bench of this Court in the case of Naresh Shridhar Mirajkar and others vs. State of Maharashtra and Anr. 3 in support of his proposition that a judicial decision cannot be corrected by this Court in exercise of its jurisdiction under Article 32 of the Constitution of India. He also relied on the judgment of a Seven­Judge Bench of this Court in the case of A.R. Antulay vs. R.S. Nayak and another4 to contend that the judicial proceedings in this Court are not subject to the writ jurisdiction thereof.

2 (2019) 20 SCC 747 = Contempt Petition (C) No. 928 of 2016 in Transfer Case (C) No. 95 of 2015, decided on 26th April 2019 3 (1966) 3 SCR 744 4 (1988) 2 SCC 602
9. Mr. Prashant Bhushan further submitted that this Court in the case of Anil Kumar Barat vs. Secretary, Indian Tea Association and others5 has also held that the validity of an order passed by this Court itself cannot be subject to writ jurisdiction of this Court.

10. Mr. Bhushan also relied on the judgments of a Three­ Judge Bench of this Court in the cases of Khoday Distilleries Ltd. and another vs. Registrar General, Supreme Court of India6, Mohd. Aslam vs. Union of India and others 7 and Union of India and others vs. Major S.P. Sharma and others8 and the judgment of a Five­Judge Bench of this Court in the case of Rupa Ashok Hurra vs. Ashok Hurra and another9 to buttress his submissions.

11. Mr. Bhushan further submitted that in the case of Jayantilal N. Mistry (supra), several Miscellaneous 5 (2001) 5 SCC 42 6 (1996) 3 SCC 114 7 (1996) 2 SCC 749 8 (2014) 6 SCC 351 9 (2002) 4 SCC 388 Applications were filed on behalf of the Banks for impleadment. As such, the judgment delivered in the case of Jayantilal N. Mistry (supra) is after consideration of rival submissions, which now cannot be reopened. He further submitted that this Court by order dated 28th April 2021, passed in M.A. No.2342 of 2019 in Transferred Case (Civil) No.91 of 2015 and other connected matters has specifically rejected the prayer filed by the Banks (writ petitioners herein) for recall of the judgment dated 16th December 2015 passed by this Court in the case of Jayantilal N. Mistry (supra), and as such, the present writ petitions are liable to be dismissed.

12. Per contra, the learned Senior Counsels appearing on behalf of the writ petitioners/Banks submit that though M.A. No.2342 of 2019 in Transferred Case (Civil) No.91 of 2015 and other connected matters were rejected by this Court by order dated 28th April 2021, this Court clarified that the dismissal of those applications shall not prevent the applicant­Banks therein to pursue other remedies available to them in law. It is thus submitted that the said order would not come in the way of the present petitioners in filing the present petitions.

13. It is submitted that Section 11 of the RTI Act provides that when any information relating to third party has been sought, a written notice is required to be given to such third party of the request, by the Central Public Information Officer or State Public Information Officer, as the case may be, and the submissions by such third party are required to be taken into consideration while taking a decision about the disclosure of the information. Reliance in this respect has been placed on the judgment of this Court in the case of Chief Information Commissioner vs. High Court of Gujarat and another 10. It is submitted that this Court in the case of Jayantilal N. Mistry (supra) has not taken into consideration this aspect of the matter.

14. It is further submitted on behalf of the writ petitioners/Banks that the right to privacy has been said to be 10 (2020) 4 SCC 702 as implicit fundamental right by a Five­Judge Constitution Bench of this Court in the case of Supreme Court Advocates­ on­Record Association and another vs. Union of India11. It is submitted that the said view is also reiterated by a Nine­ Judge Constitution Bench of this Court in the case of K.S. Puttaswamy and another vs Union of India and others12, which has explicitly and categorically recognised the right to privacy as a fundamental right.

15. Mr. Rakesh Dwivedi, learned Senior Counsel, relied on the judgment of this Court in the case of A.R. Antulay (supra) in support of the proposition that no man should suffer because of the mistake of the Court. He submits that the rules of procedure are the handmaidens of justice and not the mistress of justice. He relies on the maxim “ex debito justitiae”. He further relies on the judgment of this Court in the case of Sanjay Singh and another vs. U.P. Public Service 11 (2016) 5 SCC 1 12 (2017) 10 SCC 1 Commission, Allahabad and another13 in support of the submission that the petition would be tenable.

16. Mr. Mukul Rohatgi, learned Senior Counsel, submitted that the petitioners herein are private banks and not a public authority as defined under the RTI Act. He relies on the judgment of this Court in the case of Thalappalam Service Cooperative Bank Limited and others vs. State of Kerala and others14 in that regard. He submitted that RBI’s Inspection Reports in respect of the inspection carried out under Section 35 of the Banking Regulation Act, 1949 are so confidential that they cannot even be provided to the Directors individually. He relies on the communication issued by the RBI to all the Banks dated 14th March 1998 in this regard.

17. Mr. Rohatgi further submitted that an earlier policy as notified by the RBI on 30th June 1992 was in tune with the provisions of Section 8 of the RTI Act, the provisions of the Reserve Bank of India Act, 1934 (hereinafter referred to as “the 13 (2007) 3 SCC 720 14 (2013) 16 SCC 82 RBI Act”) and the Banking Regulation Act, 1949. However, in view of the judgment of this Court in the case of Girish Mittal (supra), the RBI has modified the policy into a one­line policy, providing therein that the disclosure of information was to be in accordance with the judgment and order of this Court in Girish Mittal (supra). Mr. Rohatgi, learned Senior Counsel relied on the judgment of this Court in the case of Bihar Public Service Commission vs. Saiyed Hussain Abbas Rizwi and another15 in support of his submission that the Court will have to strike a balance between public interest and private interest. He also relies on the judgment of this Court in the case of Girish Ramchandra Deshpande vs. Central Information Commissioner and others16 to contend that personal information cannot be directed to be disclosed unless outweighing public interest demands it to be done.

18. Mr. K.V. Viswanathan, learned Senior Counsel submits that HDFC Bank, Kotak Bank and Bandhan Bank were not 15 (2012) 13 SCC 61 16 (2013) 1 SCC 212 parties in the case of Jayantilal N. Mistry (supra). He submits that sub­Section (5) of Section 35 of the Banking Regulation Act, 1949 provides a specific procedure as to in what manner the inspection report would be published. He submits that when a special Act provides a particular manner for disclosure of an information, it will have an overriding effect over the RTI Act. The learned Senior Counsel submits that the said provisions were not noticed in the case of Jayantilal N. Mistry (supra).

19. Mr. Jaideep Gupta, learned Senior Counsel submitted that this Court in the case of Jayantilal N. Mistry (supra) has not taken into consideration the provisions of the Credit Information Companies (Regulation) Act, 2005.

20. Mr. Dushyant Dave, learned Senior Counsel, submitted that Section 45NB of the RBI Act emphasizes on the confidentiality of certain information with regard to non­ banking companies. He submits that sub­section (4) of Section 45NB of the RBI Act, which is a non­obstante clause, provides that, notwithstanding anything contained in any law for the time being in force, no court or tribunal or other authority shall compel the Bank to produce or to give inspection of any statement or other material obtained by the Bank under any provisions of this Chapter. He submits that this provision has not been noticed in the case of Jayantilal N. Mistry (supra).

21. It is submitted on behalf of all the writ petitioners/Banks that what is under challenge is the action of the RBI compelling the petitioners to disclose certain information which itself is exempted under the provisions of the RBI Act. It is submitted that various other special enactments specifically prohibit such information to be disclosed. It is submitted that since the RBI’s directions are issued in pursuance to the judgments of this Court in the cases of Jayantilal N. Mistry (supra) and Girish Mittal (supra), the petitioners cannot approach the High Court and the only remedy that is available to the petitioners is by way of the present writ petitions. It is submitted by learned Senior Counsels appearing on behalf of the writ petitioners/Banks that this Court in Jayantilal N. Mistry (supra) does not notice the judgment of this Court in the case of Supreme Court Advocates­on­Record Association and another (supra). The judgment of this Court in the case of Supreme Court Advocates­on­Record Association and another (supra) was rendered on 16th October 2015, whereas the judgment of this Court in the case of Jayantilal N. Mistry (supra) was rendered on 16th December 2015. It is further submitted that, in view of the judgment of the Constitution Bench consisting of Nine Hon’ble Judges in the case of K.S. Puttaswamy and another (supra) clearly recognizing the right to privacy as a fundamental right, the law laid down by this Court in the case of Jayantilal N. Mistry (supra) to the contrary is no more a good law and, therefore, requires reconsideration by a larger Bench.

22. In the case of Naresh Shridhar Mirajkar and others (supra), a Nine­Judge Constitution Bench of this Court was considering as to whether an order passed by the High Court on original side in the proceedings before it could be challenged under Article 32 of the Constitution for enforcement of fundamental rights guaranteed under Article 19(1)(a), (d) and

(g) of the Constitution of India. It will be relevant to refer to the following observations of this Court in the said case:

“The basis of Mr Setalvad’s argument is that the impugned order is not an order inter­ partes, as it affects the fundamental rights of the strangers to the litigation, and that the said order is without jurisdiction. We have already held that the impugned order cannot be said to affect the fundamental rights of the petitioners and that though it is not inter­partes in the sense that it affects strangers to the proceedings, it has been passed by the High Court in relation to a matter pending before it for its adjudication and as such, like other judicial orders passed by the High Court in proceedings pending before it, the correctness of the impugned order can be challenged only by appeal and not by writ proceedings. We have also held that the High Court has inherent jurisdiction to pass such an order.
But apart from this aspect of the matter, we think it would be inappropriate to allow the petitioners to raise the question about the jurisdiction of the High Court to pass the impugned order in proceedings under Article 32 which seek for the issue of a writ of certiorari to correct the said order. If questions about the jurisdiction of superior courts of plenary jurisdiction to pass orders like the impugned order are allowed to be canvassed in writ proceedings under Article 32, logically, it would be difficult to make a valid distinction between the orders passed by the High Courts inter­partes, and those which are not inter­partes in the sense that they bind strangers to the proceedings. Therefore, in our opinion, having regard to the fact that the impugned order has been passed by a superior court of record in the exercise of its inherent powers, the question about the existence of the said jurisdiction as well as the validity or propriety of the order cannot be raised in writ proceedings taken out by the petitioners for the issue of a writ of certiorari under Article 32.” [emphasis supplied]

23. It could thus be seen that the Nine­Judge Bench of this Court, speaking through P.B. Gajendragadkar, CJ., categorically held that the impugned orders could not affect the fundamental rights of the petitioners. It has further been held that since the order was passed in the proceedings pending before the High Court, the correctness of the impugned order could be challenged only by appeal and not by writ proceedings. It has been further held that, having regard to the fact that the order had been passed by a superior court of record in the exercise of its inherent powers, the question about the existence of the said jurisdiction as well as the validity or propriety of the order could not be raised in writ proceedings taken out by the petitioners for the issue of a writ of certiorari under Article 32. This Court further observed thus:

“We are, therefore, satisfied that so far as the jurisdiction of this Court to issue writs of certiorari is concerned, it is impossible to accept the argument of the petitioners that judicial orders passed by High Courts in or in relation to proceedings pending before them, are amenable to be corrected by exercise of the said jurisdiction. We have no doubt that it would be unreasonable to attempt to rationalise the assumption of jurisdiction by this Court under Article 32 to correct such judicial orders on the fanciful hypothesis that High Courts may pass extravagant orders in or in relation to matters pending before them and that a remedy by way of a writ of certiorari should, therefore, be sought for and be deemed to be included within the scope of Article 32. The words used in Article 32 are no doubt wide; but having regard to the considerations which we have set out in the course of this judgment, we are satisfied that the impugned order cannot be brought within the scope of this Court’s jurisdiction to issue a writ of certiorari under Article 32; to hold otherwise would be repugnant to the well­recognised limitations within which the jurisdiction to issue writs of certiorari can be exercised and inconsistent with the uniform trend of this Court’s decisions in relation to the said point.” [emphasis supplied]
24. It could thus be seen that this Court held that it would be unreasonable to hold that this Court, under Article 32, could correct the judicial orders on the fanciful hypothesis that High Courts may pass extravagant orders in or in relation to matters pending before them and therefore this Court can correct the same by issuance of a writ of certiorari under Article 32. This Court held that though the words used in Article 32 are wide, the order impugned before it could not be brought within the scope of this Court’s jurisdiction to issue a writ of certiorari under Article 32.

25. Insofar as the judgment of this Court in the case of Khoday Distilleries Ltd. and another (supra), on which Mr. Prashant Bhushan placed reliance, is concerned, this Court in the said case was considering therein a challenge to the correctness of the decision on merits after the appeal as well as review petition were dismissed.

26. In the case of Mohd. Aslam (supra), this Court held that Article 32 of the Constitution was not available to assail the correctness of a decision on merits or to claim reconsideration. It, however, considered the contention raised on behalf of the petitioners that the judgment in the case of Manohar Joshi vs. Nitin Bhaurao Patil and another17 was in conflict with the Constitution Bench judgement of this Court in the case of S.R. Bommai and others vs. Union of India and others 18. This Court after considering the submissions found that the opinion so expressed was misplaced.

27. Insofar as the judgment of this Court in the case of Major S.P. Sharma and others (supra) is concerned, in the said case, the first round of litigation arising out of termination of respondent­employee had reached finality upto this Court. 17 (1996) 1 SCC 169 18 (1994) 3 SCC 1 However, the same was sought to be reopened by filing another writ petition before the High Court. In this background, this Court observed thus:

“90. Violation of fundamental rights guaranteed under the Constitution have to be protected, but at the same time, it is the duty of the court to ensure that the decisions rendered by the court are not overturned frequently, that too, when challenged collaterally as that was directly affecting the basic structure of the Constitution incorporating the power of judicial review of this Court. There is no doubt that this Court has an extensive power to correct an error or to review its decision but that cannot be done at the cost of doctrine of finality. An issue of law can be overruled later on, but a question of fact or, as in the present case, the dispute with regard to the termination of services cannot be reopened once it has been finally sealed in proceedings inter se between the parties up to this Court way back in 1980.”
28. It could thus be seen that this court has held that when a question of fact has reached finality inter se between the parties, it cannot be reopened in a collateral proceeding. However, it has been observed that an issue of law can be overruled later on.

29. Mr. Prashant Bhushan strongly relied on the judgment of this Court in the case of Rupa Ashok Hurra (supra). It will be relevant to refer to the following observations of this Court in the judgment of Quadri, J.

“41. At one time adherence to the principle of stare decisis was so rigidly followed in the courts governed by the English jurisprudence that departing from an earlier precedent was considered heresy. With the declaration of the practice statement by the House of Lords, the highest court in England was enabled to depart from a previous decision when it appeared right to do so.

The next step forward by the highest court to do justice was to review its judgment inter partes to correct injustice. So far as this Court is concerned, we have already pointed out above that it has been conferred the power to review its own judgments under Article 137 of the Constitution. The role of the judiciary to merely interpret and declare the law was the concept of a bygone age. It is no more open to debate as it is fairly settled that the courts can so mould and lay down the law formulating principles and guidelines as to adapt and adjust to the changing conditions of the society, the ultimate objective being to dispense justice. In the recent years there is a discernible shift in the approach of the final courts in favour of rendering justice on the facts presented before them, without abrogating but bypassing the principle of finality of the judgment. In Union of India v. Raghubir Singh [(1989) 2 SCC 754] Pathak, C.J. speaking for the Constitution Bench aptly observed: (SCC pp. 766­67, para

10) “10. But like all principles evolved by man for the regulation of the social order, the doctrine of binding precedent is circumscribed in its governance by perceptible limitations, limitations arising by reference to the need for readjustment in a changing society, a readjustment of legal norms demanded by a changed social context. This need for adapting the law to new urges in society brings home the truth of the Holmesian aphorism that ‘the life of the law has not been logic it has been experience’ (Oliver Wendell Holmes : The Common Law, p. 5), and again when he declared in another study (Oliver Wendell Holmes : Common Carriers and the Common Law, (1943) 9 Curr LT 387, 388) that ‘the law is forever adopting new principles from life at one end’, and ‘sloughing off’ old ones at the other. Explaining the conceptual import of what Holmes had said, Julius Stone elaborated that it is by the introduction of new extra­legal propositions emerging from experience to serve as premises, or by experience­guided choice between competing legal propositions, rather than by the operation of logic upon existing legal propositions, that the growth of law tends to be determined (Julius Stone : Legal Systems & Lawyers Reasoning, pp.

58­59).”

42. The concern of this Court for rendering justice in a cause is not less important than the principle of finality of its judgment. We are faced with competing principles — ensuring certainty and finality of a judgment of the Court of last resort and dispensing justice on reconsideration of a judgment on the ground that it is vitiated being in violation of the principles of natural justice or giving scope for apprehension of bias due to a Judge who participated in the decision­ making process not disclosing his links with a party to the case, or on account of abuse of the process of the court.

Such a judgment, far from ensuring finality, will always remain under the cloud of uncertainty. Almighty alone is the dispenser of absolute justice — a concept which is not disputed but by a few. We are of the view that though Judges of the highest court do their best, subject of course to the limitation of human fallibility, yet situations may arise, in the rarest of the rare cases, which would require reconsideration of a final judgment to set right miscarriage of justice complained of. In such case it would not only be proper but also obligatory both legally and morally to rectify the error. After giving our anxious consideration to the question, we are persuaded to hold that the duty to do justice in these rarest of rare cases shall have to prevail over the policy of certainty of judgment as though it is essentially in the public interest that a final judgment of the final court in the country should not be open to challenge, yet there may be circumstances, as mentioned above, wherein declining to reconsider the judgment would be oppressive to judicial conscience and would cause perpetuation of irremediable injustice.

xxx xxx xxx

49. The upshot of the discussion in our view is that this Court, to prevent abuse of its process and to cure a gross miscarriage of justice, may reconsider its judgments in exercise of its inherent power.” [emphasis supplied]

30. This Court in the aforesaid case held that the concern of this Court for rendering justice in a cause is not less important than the principle of finality of its judgment. The Court has to balance ensuring certainty and finality of a judgment of the Court of last resort on one hand and dispensing justice on reconsideration of a judgment on the valid grounds on the other hand. This Court has observed that though Judges of the highest court do their best, yet situations may arise, in the rarest of the rare cases, which would require reconsideration of a final judgment to set right miscarriage of justice complained of. It has been held that in such a case it would not only be proper but also obligatory both legally and morally to rectify the error. This Court further held that to prevent abuse of its process and to cure a gross miscarriage of justice, the Court may reconsider its judgments in exercise of its inherent power.

31. This Court in the case of A.R. Antulay (supra), speaking through Sabyasachi Mukharji, J. observed thus:

“82. Lord Cairns in Rodger v. Comptoir D’escompte De Paris [(1869­71) LR 3 PC 465, 475 : 17 ER 120] observed thus:
“Now, Their Lordships are of opinion, that one of the first and highest duties of all courts is to take care that the act of the court does no injury to any of the suitors, and when the expression ‘the act of the court’ is used, it does not mean merely the act of the primary court, or of any intermediate court of appeal, but the act of the court as a whole, from the lowest court which entertains jurisdiction over the matter up to the highest court which finally disposes of the case.
It is the duty of the aggregate of those Tribunals, if I may use the expression, to take care that no act of the court in the course of the whole of the proceedings does an injury to the suitors in the court.
83. This passage was quoted in the Gujarat High Court by D.A. Desai, J., speaking for the Gujarat High Court in Soni Vrajlal v. Soni Jadavji [AIR 1972 Guj 148 : (1972) 13 Guj LR 555] as mentioned before. It appears that in giving directions on 16­2­1984, this Court acted per incuriam inasmuch it did not bear in mind consciously the consequences and the provisions of Sections 6 and 7 of the 1952 Act and the binding nature of the larger Bench decision in Anwar Ali Sarkar case [AIR 1952 SC 75 : 1952 SCR 284 : 1952 Cri LJ 510] which was not adverted to by this Court. The basic fundamentals of the administration of justice are simple. No man should suffer because of the mistake of the court. No man should suffer a wrong by technical procedure of irregularities. Rules or procedures are the handmaids of justice and not the mistress of the justice. Ex debito justitiae, we must do justice to him. If a man has been wronged so long as it lies within the human machinery of administration of justice that wrong must be remedied. This is a peculiar fact of this case which requires emphasis.”

32. It could thus be seen that the principle of ex debito justitiae has been emphasized. This Court held that no man should suffer because of the mistake of the court. No man should suffer a wrong by technical procedure of irregularities. It has been held that the rules of procedure are the handmaidens of justice and not the mistress of justice. It has further been held that if a man has been wronged, so long as the wrong lies within the human machinery of administration of justice, that wrong must be remedied.

33. Ranganath Misra, J., in his concurrent opinion, observed thus:

“102. This being the apex court, no litigant has any opportunity of approaching any higher forum to question its decisions. Lord Buckmaster in Montreal Street Railway Co. v. Normadin [1917 AC 170] (sic) stated:
All rules of court are nothing but provisions intended to secure proper administration of justice. It is, therefore, essential that they should be made to serve and be subordinate to that purpose.

This Court in State of Gujarat v. Ramprakash P. Puri [(1969) 3 SCC 156 : 1970 SCC (Cri) 29 : (1970) 2 SCR 875] reiterated the position by saying [SCC p. 159 : SCC (Cri) p. 31, para 8] Procedure has been described to be a handmaid and not a mistress of law, intended to subserve and facilitate the cause of justice and not to govern or obstruct it. Like all rules of procedure, this rule demands a construction which would promote this cause Once judicial satisfaction is reached that the direction was not open to be made and it is accepted as a mistake of the court, it is not only appropriate but also the duty of the court to rectify the mistake by exercising inherent powers. Judicial opinion heavily leans in favour of this view that a mistake of the court can be corrected by the court itself without any fetters. This is on the principle as indicated in (Alexander) Rodger case [(1969­71) LR 3 PC 465 : 17 ER 120] . I am of the view that in the present situation, the court’s inherent powers can be exercised to remedy the mistake. Mahajan., J.
speaking for a Four Judge Bench in Keshardeo Chamria v. Radha Kissen Chamria [1953 SCR 136 : AIR 1953 SC 23] at Page 153 stated:

The judge had jurisdiction to correct his own error without entering into a discussion of the grounds taken by the decree­holder or the objections raised by the judgment­debtors.
103. The Privy Council in Debi Bakhsh Singh v. Habib Shah [ILR (1913) 35 All 331] pointed out that an abuse of the process of the court may be committed by the court or by a party. Where a court employed a procedure in doing something which it never intended to do and there is an abuse of the process of the court it can be corrected. Lord Shaw spoke for the Law Lords thus:

Quite apart from Section 151, any court might have rightly considered itself to possess an inherent power to rectify the mistake which had been inadvertently made.

It was pointed out by the Privy Council in The Bolivar [AIR 1916 PC 85] that:

Where substantial injustice would otherwise result, the Court has, in Their Lordships’ opinion, an inherent power to set aside its own judgments of condemnation so as to let in bona fide claims by parties…
Indian authorities are in abundance to support the view that injustice done should be corrected by applying the principle actus curia neminem gravabit — an act of the court should prejudice no one.

104. To err is human, is the oft­quoted saying. Courts including the apex one are no exception. To own up the mistake when judicial satisfaction is reached does not militatte against its status or authority. Perhaps it would enhance both.”
34. It has been held that this being the apex court, no litigant has any opportunity of approaching any higher forum to question its decisions. It has further been held that once a judicial satisfaction is reached that the direction was not open to be made and it is accepted as a mistake of the court, it is not only appropriate but also the duty of the court to rectify the mistake by exercising its inherent powers. It has been held that, to err is human, and the Courts including the Apex Court are no exception.

35. This Court in the case of Sanjay Singh and another (supra) has observed thus:

“10. The contention of the Commission also overlooks the fundamental difference between challenge to the final order forming part of the judgment and challenge to the ratio decidendi of the judgment. Broadly speaking, every judgment of superior courts has three segments, namely, (i) the facts and the point at issue; (ii) the reasons for the decision; and (iii) the final order containing the decision. The reasons for the decision or the ratio decidendi is not the final order containing the decision.

In fact, in a judgment of this Court, though the ratio decidendi may point to a particular result, the decision (final order relating to relief) may be different and not a natural consequence of the ratio decidendi of the judgment. This may happen either on account of any subsequent event or the need to mould the relief to do complete justice in the matter. It is the ratio decidendi of a judgment and not the final order in the judgment, which forms a precedent. The term “judgment” and “decision” are used, rather loosely, to refer to the entire judgment or the final order or the ratio decidendi of a judgment. Rupa Ashok Hurra [(2002) 4 SCC 388] is of course, an authority for the proposition that a petition under Article 32 would not be maintainable to challenge or set aside or quash the final order contained in a judgment of this Court. It does not lay down a proposition that the ratio decidendi of any earlier decision cannot be examined or differed in another case. Where violation of a fundamental right of a citizen is alleged in a petition under Article 32, it cannot be dismissed, as not maintainable, merely because it seeks to distinguish or challenge the ratio decidendi of an earlier judgment, except where it is between the same parties and in respect of the same cause of action. Where a legal issue raised in a petition under Article 32 is covered by a decision of this Court, the Court may dismiss the petition following the ratio decidendi of the earlier decision. Such dismissal is not on the ground of “maintainability” but on the ground that the issue raised is not tenable, in view of the law laid down in the earlier decision. But if the Court is satisfied that the issue raised in the later petition requires consideration and in that context the earlier decision requires re­examination, the Court can certainly proceed to examine the matter (or refer the matter to a larger Bench, if the earlier decision is not of a smaller Bench). When the issue is re­examined and a view is taken different from the one taken earlier, a new ratio is laid down. When the ratio decidendi of the earlier decision undergoes such change, the final order of the earlier decision as applicable to the parties to the earlier decision, is in no way altered or disturbed. Therefore, the contention that a writ petition under Article 32 is barred or not maintainable with reference to an issue which is the subject­matter of an earlier decision, is rejected.” [emphasis supplied]

36. After referring to the judgment of this Court in the case of Rupa Ashok Hurra (supra), this Court has held that it does not lay down a proposition that the ratio decidendi of an earlier decision cannot be examined or differed with in another case. It has been held that if the Court is satisfied that the issue raised in the later petition requires consideration and in that context, the earlier decision requires re­examination, the Court can certainly proceed to examine the matter or refer the matter to a larger Bench, if the earlier decision is not of a smaller Bench. This Court, therefore, specifically rejected the contention that a writ petition under Article 32 of the Constitution was barred or not maintainable with reference to an issue which was the subject matter of an earlier decision.

37. In the present case, admittedly, the writ petitioners/Banks were not parties in the case of Jayantilal N. Mistry (supra). Though the Miscellaneous Applications filed by HDFC Bank and others for recall of the judgment and order in the case of Jayantilal N. Mistry (supra) were rejected by this Court vide order dated 28 th April 2021, this Court in the said order specifically observed thus:

“The dismissal of these applications shall not prevent the applicants to pursue other remedies available to them in law.”
38. It is thus clear that this Court did not foreclose the right of the petitioners/Banks to pursue other remedies available to them in law.

39. In view of the judgment of this Court in the case of Jayantilal N. Mistry (supra), the RBI is entitled to issue directions to the petitioners/Banks to disclose information even with regard to the individual customers of the Bank. In effect, it may adversely affect the individuals’ fundamental right to privacy.

40. A Nine­Judge Constitution Bench of this Court in the case of K.S. Puttaswamy and another (supra) has held that the right to privacy is a fundamental right. No doubt that the right to information is also a fundamental right. In case of such a conflict, the Court is required to achieve a sense of balance.

41. A perusal of the judgments of this Court cited supra would reveal that it has been held that though the concept of finality of judgment has to be preserved, at the same time, the principle of ex debito justitiae cannot be given a go­bye. If the Court finds that the earlier judgment does not lay down a correct position of law, it is always permissible for this Court to reconsider the same and if necessary, to refer it to a larger Bench.

42. Without expressing any final opinion, prima facie, we find that the judgment of this Court in the case of Jayantilal N. Mistry (supra) did not take into consideration the aspect of balancing the right to information and the right to privacy. The petitioners have challenged the action of the respondent­RBI, vide which the RBI issued directions to the petitioners/Banks to disclose certain information, which according to the petitioners is not only contrary to the provisions as contained in the RTI Act, the RBI Act and the Banking Regulation Act, 1949, but also adversely affects the right to privacy of such Banks and their consumers. The RBI has issued such directions in view of the decision of this Court in the case of Jayantilal N. Mistry (supra) and Girish Mittal (supra). As such, the petitioners would have no other remedy than to approach this Court. As observed by Ranganath Misra, J. in the case of A.R. Antulay (supra) that, this being the Apex Court, no litigant has any opportunity of approaching any higher forum to question its decision. The only remedy available to the petitioners would be to approach this Court by way of writ petition under Article 32 of the Constitution of India for protection of the fundamental rights of their customers, who are citizens of India.

43. We, therefore, hold that the preliminary objection as raised is not sustainable. The same is rejected. I.A. No.51632 of 2022 in Writ Petition (Civil) No.1159 of 2019 and I.A. No.54521 of 2022 in Writ Petition (Civil) No.683 of 2021 are accordingly dismissed.

………………………….J.

[B.R. GAVAI] ………………………….J.

[C.T. RAVIKUMAR] NEW DELHI;

SEPTEMBER 30, 2022.

CBDT Guidelines for compulsory selection of returns for Complete Scrutiny during the Financial Year 2022-23

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F.No.225/ 81/2022/ITA-11
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes (ITA-II division)

North Block, New Delhi, the2 September, 2022

To

All Pr. Chief Commissioners of Income-tax/ Chief Commissioners of Income-tax All Pr. Director Generals of Income-tax/ Director Generals of Income-tax.

Madam/Sir

Subject: Guidelines for compulsory selection of returns for Complete Scrutiny during the Financial Year 2022-23 — procedure for compulsory selection in such cases — regarding.

Kindly refer to CBDT’s Guidelines dated 11.05.2022 and 03.06.2022 on the above-mentioned subject (copies enclosed).

  1. With reference to the above, I am directed to state that SI.No.2.2 of para no.2 of CBDT’s Guidelines dated 03.06.2022 shall be substituted as under:
Si. No. r                                 Parameter Procedure      for      compulsory

selection
2 Cases pertaining to search & seizure/requisition
2.2 Search           &    seizure/requisition    on    or   after The cases shall be selected for

scrutiny                    with            prior

administrative    approval        of Pr.

CIT/Pr. DIT/CIT/DIT concerned, who shall ensure that such cases are transferred to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2)/142(1) of the Act by the Assessing Officer concerned.
01.04.2021: Assessments in cases arising from
search & seizure actions/requisitions u/s 132/132A conducted on or after 01.04.2021.

 

  1. All other contents of the said Guidelines will remain unchanged.
  2. The above may be brought to the notice of all concerned for necessary compliance. Enclosure: As above

tici)qt 2–4—–

(Ravinder Maini)

Director (ITA-H), CBDT

Copy to:

  1. PS to FM/PS to MoS (F)
  2. PS to Secretary (Revenue)
  • Chairman, CBDT & All Members, CBDT
  1. All Joint Secretaries/CsIT, CBDT
  2. DGIT (Systems)
  3. Web Manager with request to upload on the Departmental website
  • JDIT, Data-Base Cell for uploading on irsofficersonline website

2:671 12622— –

(Ravinder Maini) Director (ITA-II), CBDT

 

F.No.225/ 81/2022/ITA-11
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes (ITA-II division)

North Block, New Delhi, the tLJune, 2022

To

All Pr. Chief Commissioners of Income-tax/ Chief Commissioners of Income-tax

All Pr. Director Generals of Income-tax/ Director Generals of Income-tax.

Madam/Sir

Subject: Guidelines for compulsory selection of returns for Complete Scrutiny during the Financial Year 2022-23 — procedure for compulsory selection in such cases — regarding.

Kindly refer to CBDT’s Guidelines dated 11.05.2022 on the above-mentioned subject (copy enclosed).

  1. With reference to the above, I am directed to state that Sl.No.2 of para no.2 of CBDT’s Guidelines dated 11.05.2022 shall be substituted as under:
Si. No. Parameter Procedure for compulsory selection
2 Cases pertaining to search & seizure/requisition
2.1 Search          &     seizure/requisition           prior     to The cases shall be selected
for     scrutiny        with      prior

administrative     approval     of

Pr.             CIT/Pr.             DIT/CIT/DIT
concerned, who shall ensure
that    such                            cases            are

transferred to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2)/142(1) of the Act by the Assessing Officer concerned.
01.04.2021: Assessments in search & seizure cases
to be made under Section(s) 153A, 153C read with section 143(3) of the Act and also for return filed for assessment year relevant to previous year in which the search was conducted u/s 132 or requisition was made u/s 132A of the Act.

 

    Where such cases are not centralized and Return of Income is filed in response to notice u/s 153C, the Assessing Officer concerned shall serve notice u/s 143(2) of the Act.

Where such cases are not centralized and no Return of Income is filed in response to notice u/s 153C, the Assessing Officer concerned shall serve notice u/s 142(1) of the Act calling for information.
2.2 Search          &   seizure/requisition    on         or        after The cases shall be selected for scrutiny with prior administrative approval of Pr. CIT/Pr. DIT/CIT/DIT concerned, who shall ensure that such cases are transferred to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2)/142(1) of the Act by the Assessing Officer concerned.
01.04.2021: Assessments in cases arising from
search & seizure actions/requisitions u/s 132/132A conducted on or after 01.04.2021, for returns pertaining to A.Y. 2021-22.

 

  1. All other contents of the said Guidelines will remain unchanged.
  2. The above may be brought to the notice of all concerned for necessary compliance.

Enclosure: As above

6TP 612121

(Ravinder Mai i) Director (ITA-II), CBDT

 

Copy to:

  1. PS to FM/PS to MoS (F)
  2. PS to Secretary (Revenue)
  • Chairman, CBDT & All Members, CBDT
  1. All Joint Secretaries/CsIT, CBDT
  2. DGIT (Systems)
  3. Web Manager with request to upload on the Departmental website
  • JDIT, Data-Base Cell for uploading on irsofficersonline website

a oto2-2– (Ravinder Maini

Director (ITA-II), CBDT

 

F.No.225/ 81/2022/ITA-11
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes (ITA-II division)

North Block, New Delhi, the 11 to May, 2022

To

All Pr. Chief Commissioners of Income-tax/ Chief Commissioners of Income-tax All Pr. Director Generals of Income-tax/ Director Generals of Income-tax.

Madam/Sir

Subject: Guidelines for compulsory selection of returns for Complete Scrutiny during the Financial Year 2022-23 — procedure for compulsory selection in such cases — regarding.

Kindly refer to the above.

  1. The parameters for compulsory selection of returns for Complete Scrutiny during Financial Year 2022-23 and procedure for compulsory selection in such cases are prescribed as under:
S
No		 Parameter Procedure for compulsory selection
  Cases pertaining to survey u/s 133A of the Income-tax Act,1961(Act)
Returns filed for the assessment year relevant to The cases shall be selected for compulsory
  the previous year in which survey was conducted scrutiny with prior administrative approval
  under section 133A of the Act subject to exclusion below: of Pr.        CIT/Pr.DIT/CIT/D1T concerned,

who      shall ensure that such cases    are
transferred to Central Charges u/s 127 of
  Exclusion: the Act within 15 days of service of notice
  Cases, where following conditions are satisfied, are excluded from selection for compulsory scrutiny: u/s 143(2) of the Act by the Assessing Officer concerned.
  1.      books of accounts, documents, etc. were not impounded;

2.      returned income (excluding any disclosure

of hitherto undisclosed                 income made

  

 

  during the Survey) is not less than returned .1 income of preceding assessment year; and

3.            assessee     has        not     retracted   from    the

disclosure referred to in point 2 above.

  
2 Cases pertaining to Search and Seizure
  Assessments in Search and Seizure cases to be made under section(s) 153A, 153C read with section 143(3) of the Act and also for return filed for assessment year relevant to previous year in which the Search was conducted under section 132 or requisition was made under section 132A of the Act. The cases shall be selected for compulsory scrutiny with prior administrative approval of Pr. CIT/Pr.DIT/CIT/DIT concerned, who shall ensure that such cases are transferred to Central Charges u/s 127 of the Act within 15 days of service of notice airs 143(2)1142(1) of the Act by the Assessing Officer concerned.

Where such cases are not centralized and Return of Income is filed in response to notice u/s I 53C, the Assessing Officer concerned shall serve notice u/s 143(2) of the Act.

Where such cases are not centralized and no Return of Income is filed in response to notice this 153C, the Assessing Officer concerned shall serve notice u/s 142(1) of the Act calling for information.
3 Cases in which notices uis 142(1) of the Act, calling for return, have been issued & no returns have been furnished
  Cases where no return has been furnished in response to a notice u/s 142(1) of the Act. I The Assessing Officer shall upload the underlying documents, on the basis of which notice u/s 142(1) was issued, on ITBA, for access by National Faceless Assessment Centre (NaFAC).

The Directorate of Income-tax (Systems) shall forward these cases to NaFAC, which will take further necessary action.

 

    Notice u/s 142(1) of the Act calling for information shall be served on the assessee through NaFAC.
4  Cases in which notices u/s 148 of the Act have been issued
  Cases where return is either furnished or not furnished in response to notice u/s 148 of the Act. (i)   Cases, where notices u/s 148 of the Act have been issued pursuant to search & seizure/survey actions conducted on or after the 15‘ day of April, 2021:

These      cases    shall      be    selected    for

compulsory           scrutiny          with       prior

administrative approval of Pr. CIT/Pr.DIT/CIT/DIT concerned who shall ensure that such cases, if lying outside Central Charges, are transferred to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2)1142(1) of the Act calling for information by the Assessing Officer concerned.

(ii) Cases not covered in (i) above:

The Assessing Officer shall upload the underlying documents, on the basis of which notice u/s 148 was issued, on ITBA, for access by NaFAC.

The Directorate of Income-tax (Systems) shall forward these cases to NaFAC, which will take further necessary action.

Notice u/s 143(2)1142(1) of the Act calling for information shall be served on the assessee through NaFAC.
5 Cases related to registration/ approval under various sections of the Act, such as 12A, 35(1)(ii)/ (Ha)/ (iii), 10(23C), etc.
  Cases where registration/approval under various sections of the Act, such as section 12A, 35(I)(ii)/ (Ha)/ (iii), 10(23C), etc. have not been granted or have been cancellediwithdrawn by the Competent The Assessing Officer shall prepare a list
of cases falling under this parameter with

 

 

Authority, yet the assessee has been found to be claiming tax-exemption/deduction in the return. However, where such orders of withdrawal of registration/approval have been reversed/set-aside in appellate proceedings, those cases will not be selected under this clause.

prior administrative approval of P CIT/Pr.DITICIT/DIT concerned.

The list of such cases shall be submitted by the Pr. CITIPr.DITICIT/DIT to the Pr.CCIT concerned for onward transmission to NaFAC with a copy marked to DGIT(Systems).

 

Notice u/s 143(2) of the Act shall be served on the assessee through NaFAC.

Cases involving addition in an earlier assessment year(s) on a recurring issue of law or fact and/or law and fact

 

Where the addition in an earlier assessment year(s) on a recurring issue of law or fact and/or law and fact (including transfer pricing issue) is:

  1. exceeding Rs. 25 lakhs in eight metro charges at Ahmedabad, Bengalura„ Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune;
  2. exceeding Rs. 10 lakhs in charges other than eight metro charges;

and where such an addition:

  1. has become final, as no further appeal has been preferred against the assessment order; or
  2. has been upheld by the Appellate Authorities in favor of Revenue; even if further appeal of assessee is pending, against such order.

 

Cases related to specific information regarding tax–evasion

 

Cases, in respect of which:

(a) specific information pointing out tax-evasion for the relevant assessment year is provided by any law-enforcement agency, (Investigation Wing/ Intelligence/ Regulatory Authority/ Agency, etc.) ; and

The Assessing Officer shall prepare a list of cases falling under this parameter with prior administrative approval of Pr. CIT/Pr.DIT/CIT/DIT concerned.

The Assessing Officer shall upload the
underlying documents containing specific

 

(b) the return for the relevant assessment year information regarding tax evasion, for is furnished by the assessee.                            access by NaFAC.

The list of such cases shall be submitted by the Pr. CIT/Pr.DIT/CIT/DIT to the Pr.CCIT concerned for onward transmission to NaFAC with a copy marked to DGIT(Systems).

Notice uls 143(2) of the Act shall be served on the assessee through NaFAC.
  1. It is clarified that where return has been furnished in response to notice ids 142(1) of the Act and such notice u/s 142(1) of the Act was issued due to the information contained in NMS Cycle/SFT information/information received from Directorate of I&CI, such return will not be taken up for compulsory scrutiny. Selection of such cases for scrutiny will be done through CASS cycle.
  2. The cases shall be selected for compulsory scrutiny by the International Taxation and Central Circle charges following the above prescribed parameters and procedure with prior administrative approval of CIT/Pr.DIT/CIT/DIT concerned. The cases which are selected for compulsory scrutiny by the International Taxation and Central Circle charges following the above prescribed parameters and procedure, shall, as earlier, continue to be handled by these charges.
  3. As per the amendments brought by Finance Act 2021, the time limit for service of notice u/s 143(2) of the Act has been reduced to three months from end of the Financial Year in which the return is filed. Therefore, selection of cases and transfer of cases, wherein assessments have to be completed in faceless manner, to NaFAC shall be completed positively by 05.2022. In cases selected for compulsory scrutiny, service of notice u/s 143(2) of the Act shall be completed by 30.06.2022.
  4. These instructions may be brought to the notice of all concerned for necessary compliance.

ICIJA”-+ACtl-t2 2- (Ravinder maini)

Director (ITA-II), CBDT

Copy to:

  1. PS to FM/PS to MoS (F)
  2. PS to Secretary (Revenue)
  • Chairman, CBDT & All Members, CBDT

CBDT Revised Guidelines for compounding of offences under the Income tax Act, 1961

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Government of India Ministry of Finance

Department of Revenue Central Board of Direct Taxes

New Delhi, 17 September, 2022

PRESS RELEASE

CBDT issues Revised Guidelines for compounding of offences under the Income tax Act, 1961

In conformity with the Government’s policy of facilitating Ease of Doing Business and decriminalisation of offences, CBDT has taken steps in this direction and issued revised Guidelines for Compounding of offences under the Income-tax Act, 1961(the ‘Act’) dated 16.09.2022 with reference to various offences covered under the prosecution provisions of the Act.

Some of the major changes made for the benefit of taxpayers include making offence punishable under Section 276 of the Act as compoundable. Further, the scope of eligibility for compounding of cases has been relaxed whereby case of an applicant who has been convicted with imprisonment for less than 2 years being previously non compoundable, has now been made compoundable. The discretion available with the competent authority has also been suitably restricted.

The time limit for acceptance of compounding applications has been relaxed from the earlier limit of 24 months to 36 months now, from the date of filing of complaint. Procedural complexities have also been reduced/simplified.

Specific upper limits have been introduced for the compounding fee covering defaults across several provisions of the Act. Additional compounding charges in the nature of penal interest @ 2% per month up to 3 months and 3% per month beyond 3 months have been reduced to 1% and 2% respectively.

The revised Guidelines for Compounding of offences dated 16.09.2022 are available on http://www.incometaxindia.gov.in.

(SurabhiAhluwalia)

Pr. Commissioner of Income Tax(OSD)

(Media & Technical Policy)

Official Spokesperson, CBDT

What is “reason to believe”? Can Courts look into the sufficieny of the reasons?

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The Court relied upon S. Narayanappa v. CIT AIR 1967 SC 523, a case of re-assessment for the reason that income had escaped assessment where the Supreme Court held the Revenue must have reason to believe that the income, profits or gains chargeable to income tax had been underassessed. The Court held as under:

“2. ….. ….. But the legal position is that if there are in fact some reasonable grounds for the Income Tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of underassessment that would be sufficient to give jurisdiction to the Income Tax Officer to issue the notice under Section 34″.

It was also held that whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income Tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income Tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression “reason to believe” in Section 34 of the Income Tax Act does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it differently it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income Tax Officer in starting proceedings under Section 34 of the Act is open to challenge in a court of law. (See Calcutta Discount Co. Ltd. v. Income Tax Officer, Companies District I, Calcutta [41 ITR 191] xxx xxx xxx 15 AIR 1967 SC 523
4. ………….. The earlier stage of the proceeding for recording the reasons of the Income Tax Officer and for obtaining the sanction of the Commissioner are administrative in character and are not quasi-judicial. The scheme of Section 34 of the Act is that, if the conditions of the main section are satisfied a notice has to be issued to the assessee containing all or any of the requirements which may be included in a notice under sub-section (2) of Section If the action of the officer issuing the authorization, or of the designated officer is challenged the officer concerned must satisfy the Court about the regularity of his action. If the action is maliciously taken or power under the section is exercised for a collateral purpose, it is liable to be struck down by the Court. If the conditions for exercise of the power are not satisfied the proceeding is liable to be quashed. But where power is exercised bona fide, and in furtherance of the statutory duties of the tax officers any error of judgment on the part of the Officers will not vitiate the exercise of the power. Where the Commissioner entertains the requisite belief and for reasons recorded by him authorises a designated officer to enter and search premises for books of account and documents relevant to or useful for any proceeding under the Act, the Court in a petition by an aggrieved person cannot be asked to substitute its own opinion whether an order authorising search should have been issued. Again, any irregularity in the course of entry, search and seizure committed by the officer acting in pursuance of the authorisation will not be sufficient to vitiate the action taken, provided the officer has in executing the authorisation acted bona fide.

Ultimately, the Court summed up the law as follows:

i) The formation of opinion and the reasons to believe recorded is not a judicial or quasi-judicial function but administrative in character;

ii) The information must be in possession of the authorised official on the basis of the material and that the formation of opinion must be honest and bona fide. It cannot be merely pretence. Consideration of any extraneous or irrelevant material would vitiate the belief/satisfaction;

iii) The authority must have information in its possession on the basis of which a reasonable belief can be founded that the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him; or

iv) Such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed;

v) Such reasons may have to be placed before the High Court in the event of a challenge to formation of the belief of the competent authority in which event the Court would be entitled to examine the reasons for the formation of the belief, though not the sufficiency or adequacy thereof. In other words, the Court will examine whether the reasons recorded are actuated by mala fides or on a mere pretence and that no extraneous or irrelevant material has been considered;

vi) Such reasons forming part of the satisfaction note are to satisfy the judicial consciousness of the Court and any part of such satisfaction note is not to be made part of the order;

vii) The question as to whether such reasons are adequate or not is not a matter for the Court to review in a writ petition. The sufficiency of the grounds which induced the competent authority to act is not a justiciable issue;

viii) The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint as in administrative action as the Court does not sit as a Court of appeal but merely reviews the manner in which the decision was made. The Court shall not examine the sufficiency or adequacy thereof;

Requirement in S. 10B(8) to file the declaration before due date of filing the return is mandatory and not directory: Supreme Court in Wirpo

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IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1449 OF 2022
(Arising out of SLP(Civil) No. 7620/2021)

Principal Commissioner of Income Tax-III,
Bangalore and another …Appellants

Versus

M/s Wipro Limited …Respondent

JUDGMENT
M.R. SHAH, J.

1. Feeling aggrieved and dissatisfied with the impugned judgment and order dated 30.11.2020 passed by the High Court of Karnataka at Bengaluru in Income Tax Appeal No. 462/2017, by which the High Court has dismissed the said appeal preferred by the Revenue and has confirmed the judgment and order dated 25.11.2016 passed by the Income Tax Appellate Tribunal, Bangalore Bench ‘C’, Bangalore (for short, ‘ITAT’), allowing the assessee’s claim for carry forward of losses under Section 72 of the Income Tax Act, 1961 (for short, ‘IT Act’), the Signature Not Verified Revenue has preferred the present appeal.

2. The respondent-assessee is a 100% export-oriented unit and engaged in the business of running a call centre and IT Enabled and Remote Processing Services. Assessee filed its return of income on 31.10.2001 for Assessment Year 2001-2002, declaring loss of Rs.15,47,76,990/- and claimed exemption under Section 10B of the IT Act. Along with the original return filed on 31.10.2001, the assessee annexed a note to the computation of income in which the assessee clearly stated that the company is a 100% export-oriented unit and entitled to claim exemption under Section 10B of the IT Act and therefore no loss is being carried forward. That thereafter, the assessee filed a declaration dated 24.10.2002 before the Assessing Officer (AO) stating that the assessee does not want to avail the benefit under Section 10B of the IT Act for A.Y. 2001-02 as per Section 10B (8) of the IT Act. The assessee filed the revised return of income on 23.12.2002 wherein exemption under Section 10B of the IT Act was not claimed and the assessee claimed carry forward of losses.

2.1 Assessing Officer passed an order dated 31.03.2004 rejecting the withdrawal of exemption under Section 10B of the IT Act holding that the assessee did not furnish the declaration in writing before the due date of filing of return of income, which was 31.10.2001. Thereby, the AO made the addition in respect of denial of claim of carrying forward of losses under Section 72 of the IT Act.

2.2 Assessee filed an appeal before the Commissioner of Income Tax (Appeals), New Delhi (for short, ‘CIT(A)’). By order dated 19.01.2009, the CIT(A) upheld the order passed by the Assessing Officer making addition in respect of denial of claim of carrying forward of losses under Section 72 of the IT Act.

2.3 Aggrieved by the order passed by the CIT(A), the assessee filed an appeal before the ITAT. Vide order dated 25.11.2016, the ITAT decided the issue in favour of the assessee stating that the declaration requirement under Section 10B (8) of the IT Act was filed by the assessee before the AO before the due date of filing of return of income as per Section 139(1) of the IT Act. ITAT allowed the assessee’s claim for carrying forward of losses under Section 72 of the IT Act. 2.4 Feeling aggrieved and dissatisfied with the order passed by the ITAT, allowing the assessee’s claim for carrying forward of losses under Section 72 of the IT Act, the Revenue preferred an appeal before the High Court. By the impugned judgment and order, the High Court has dismissed the said appeal. Hence, the Revenue is before this Court by way of present appeal.

3. Shri Balbir Singh, learned Additional Solicitor General of India appearing for the Revenue has vehemently contended that in the present case, as the conditions mentioned in Section 10B (8) of the IT Act are not complied with, inasmuch as the declaration was not filed before the due date of filing of return, both, the ITAT and the High Court have committed a grave error in allowing the assessee’s claim for carrying forward of losses under Section 72 of the IT Act. 3.1 It is submitted that in the present case, the original return of income was filed on 31.10.2001, which was the due date for filing return of income. The assessee filed a declaration on 24.10.2002 before the AO stating that the assessee does not want to avail the benefit under Section 10B of the IT Act for A.Y. 2001-02. That thereafter the assessee filed the revised return of income on 23.12.2002 claiming carry forward of losses under Section 72 of the IT Act. It is submitted that therefore as the declaration required under Section 10B (8) of the IT Act was filed beyond the due date of filing of return and hence the assessee was not entitled to carry forward of losses under Section 72 of the IT Act. It is submitted that in the present case, the ITAT has wrongly noted that the declaration under Section 10B (8) of the IT Act was filed before the due date.

3.2 It is further contended that the High Court has erred in observing that the requirement under Section 10B (8) of the IT Act is a procedural requirement.

3.3 It is submitted that the High Court has not properly appreciated the consequences of not filing the declaration within the time as required under Section 10B (5) and non-compliance of Sections 10B (5) and 10B(8) of the IT Act. It is submitted that if the view taken by the High Court is accepted, in that case, it shall nullify the provisions of Sections 10B (5) and 10B (8) of the IT Act.

3.4 Shri Balbir Singh, learned ASG appearing on behalf of the Revenue further submitted that in the present case the assessee filed the revised return of income on 23.12.2002, wherein for the first time the assessee did not claim the exemption under Section 10B of the IT Act and claimed carrying forward of losses under Section 72 of the IT Act. That such a claim could not have been made while submitting the revised return of income. That the revised return of income can be filed under Section 139(5) of the IT Act only to remove the omission and mistake and/or correct the arithmetical error. It is submitted that the revised return of income under Section 139(5) of the IT Act cannot be filed for altogether a new claim. Reliance is placed on the decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax v. Andhra Cotton Mills Limited, [1996] 219 ITR 404 (AP). That in the aforesaid decision, the Andhra Pradesh High Court has held that a revised return under Section 139(5) can be filed only if there is an omission or a wrong statement. That in the aforesaid case, the assessee in the original return filed the P&L account containing provision for depreciation and did not opt for the option of not providing details regarding depreciation in its P&L account. Therefore, the High Court held that the intention of the assessee was to withdraw the claim for deduction of depreciation only to get a set-off and since particulars were furnished along with the original return, the ITO was bound to allow the deduction of depreciation in computing the income from business. 3.5 It is submitted that in the present case while filing the original return of income, the assessee specifically declared a loss of Rs. 15,47,76,990/- and claimed exemption under Section 10B of the IT Act. That as per the note annexed to the computation of income, annexed with the original return of income, the assessee specifically stated that “the company is registered as 100% export-oriented unit and is entitled to claim exemption under Section 10B of the IT Act. No loss is therefore being carried forward.” 3.6 It is submitted that as an afterthought the assessee filed a declaration as required under Section 10B (5) belatedly and after the due date mentioned in Section 10B (5) and claimed carry forward of losses under Section 72 of the IT Act, withdrawing its claim for deduction under Section 10B of the IT Act. It is contended that the High Court has not properly appreciated the fact that by filing a declaration subsequently and filing the revised return of income, the intent of the assessee was to frustrate the purpose of Section 10B of the IT Act and file a declaration under Section 10B (8) belatedly. It is submitted that the High Court has not properly appreciated the fact that the assessee’s intention to file the revised return was only as an afterthought and with the intention to extend the period of filing the declaration beyond the period specified in Section 10B (8) of the IT Act.

3.7 It is further submitted by learned ASG appearing on behalf of the Revenue that the High Court has seriously erred in observing that the requirement of submission of declaration under Section 10B (8) is mandatory in nature, but the time limit within which the declaration is to be filed is directory in nature, as the provision does not provide for any adverse consequence for not filing of the declaration by the time limit. It is submitted that the High Court has not properly appreciated and/or considered the fact that non-filing of declaration before the due date, i.e., filing of the return of income would result in denial of the benefit under Section 10B (8) of the IT Act. Therefore, it cannot be said that there is no consequence of not filing of declaration before the due date of return of income.

3.8 It is contended that the High Court has materially erred in following and relying upon the decision of the Delhi High Court in the case of Commissioner of Income Tax, Delhi-III, New Delhi v. Moser Baer India Limited, decided on 14.05.2008 in ITA No. 950/2007, wherein it was considering the requirement of Section 10B (7) of the IT Act. 3.9 It is next contended that there is a clear distinction between the provisions seeking exemption and the provisions for deduction. That Chapter III of the IT Act deals with exemptions. However, Chapter VIA deals with deductions. That Section 10B of the IT Act is an exemption provision and the condition for seeking an exemption is required to be complied with strictly with the provision.

3.10 Learned ASG submitted that as held by this Court in a catena of cases that a taxing statute should be strictly construed and that the machinery provisions must be so construed to effectuate the object and purpose of statute and that the exemption provisions must be construed strictly and by a strict interpretation. Reliance is placed on the judgments of this Court in the case of Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 and Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others (2018) 9 SCC 1.

3.10 Making the above submissions and relying upon the aforesaid decisions, it is prayed to allow the present appeal.

4. The present appeal is vehemently opposed by Shri S. Ganesh, learned Senior Advocate appearing on behalf of the respondent – assessee.

4.1 Learned counsel appearing on behalf of the assessee has submitted that the only question of law which arises in the present case is with regard to the interpretation of Section 10B (8) of the IT Act, viz., whether the requirement of submission of the declaration before the last date for submission of the return is mandatory or directory. It is submitted that on a true interpretation of Sections 10B (5) and 10B (8) of the IT Act, the High Court has rightly observed and held that the requirement of filing a declaration is mandatory in nature, while the time limit in filing the declaration is directory in nature. It is submitted that the High Court has rightly held the requirement of filing the declaration by the time limit directory as non-filing of the declaration within the time limit does not envisage any consequence. It is urged that the High Court has rightly relied upon the decision of the Delhi High Court in the case of Moser Baer (supra). It is submitted that the issues of validity of the revised return of income; whether the respondent was entitled to carry forward its losses under Sections 10B and 80 of the IT Act; and whether the assessee had duly complied with Section 80 and Section 10B (5) of the IT Act were not raised before the High Court.

4.2 It is submitted that apart from the above, even on merits also, the Revenue has no case. This is because Section 80 of the IT Act only requires that an assessee claiming carry forward of loss should file a return showing the loss before the last date for submitting the return. It is submitted that in the instant case the assessee filed the original return in time declaring the loss and thereby complied with Section 80 of the IT Act.

4.3 It is further submitted that though it was not necessary for the exercise of option under Section 10B (8) of the IT Act, the assessee filed a revised return only to bring to the notice of the AO the factum of exercise of option under Section 10B. Even if the revised return had not been filed and instead, the assessee had submitted the declaration in writing to the AO during the assessment proceedings, it would have made no difference whatsoever to the exercise of option under Section 10B (8) of the IT Act. It is submitted that therefore the validity of the revised return is wholly immaterial and irrelevant. 4.4 It is further submitted that the accountant’s certificate under Section 10B (5) is required only if the assessee claims the deduction under Section 10B. This certificate only certifies the profit/loss of Section 10B unit and the amount of deduction under Section 10B (1), if any. The certificate, if already submitted, becomes irrelevant if the claim is withdrawn under Section 10B. In any event, the contents of this certificate regarding profit/loss are not in any way affected by the withdrawal of the Section 10B claim. It is submitted that in the present case, the loss set out in Section 10B certificate remained exactly the same after withdrawal of the claim made under Section 10B and the respondent making the claim for carry forward of loss. It is submitted that there was no claim for any deduction under Section 10B (1) at any time.

4.5 It is submitted that the incontrovertible position set out in paragraphs 4.2 to 4.4 above is the precise reason why these points were not even attempted to be raised, either before the ITAT or before the High Court, and are sought to be raised before this Court for the first time and without disclosing the correct and complete facts. 4.6 It is further submitted by Shri S. Ganesh, learned counsel appearing on behalf of the assessee that on interpretation of Section 10B (8) of the IT Act, the case is squarely covered by the judgment of this Court in the case of CIT, Maharashtra v. G.M. Knitting Industries Pvt. Ltd. (2016) 12 SCC 272. It is submitted that the case involved a claim for additional depreciation on plant and machinery under Section 32(1) (ii-a) of the IT Act. That provision gave the assessee the option to claim additional depreciation, over and above the usual or ordinary depreciation mandatorily allowed under Section 32(1) of the IT Act. This option had to be exercised by the assessee by filing a statutory Form 3- AA along with the Return of Income, which gave details of the plant and machinery and also a certificate that the claim for additional depreciation was correctly made. Therefore, if the said Form 3-AA was not filed with the Return, it was a clear indication that the assessee had opted not to claim additional depreciation. In the case of G.M. Knitting (supra), the assessee did not file Form 3-AA along with the return of income, but chose to file the Form much later, but before the passing of the assessment order, which may be passed as long as 26 months after the return was filed as provided under Section 153(1) of the IT Act. The Revenue rejected the form on the ground that it had not been filed along with the return of income and declined to grant additional depreciation as claimed by the assessee. It is submitted that this Court held that the requirement that Form 3-AA should be submitted along with return was only directory and that therefore even though the Form had been submitted long after the filing of the return, the assessee was entitled to claim additional depreciation under Section 32(1)(ii-a) of the IT Act. 4.7 It is submitted that exactly the same principle applies to the interpretation of Section 10B (8) of the IT Act. Section 10B (8) enables an assessee to exclude the applicability of the deduction under Section 10B by filing a declaration to that effect before the last date in which the return of income is required to be filed. It is submitted that as held in G.M. Knitting (supra), the requirement that the Form should be submitted by a certain deadline is directory, though the submission of the Form itself may be regarded as mandatory. It is urged that the present case stands on a far stronger footing and on a far higher pedestal as compared to G.M. Knitting (supra). This is because Section 10B (8) specifically and unequivocally gives the assessee a statutory right to exercise his option and to decide not to avail of the benefit of section 10B (8) in a particular Assessment Year. For the purpose of Section 32(1)(ii-a) of the IT Act, by permitting the assessee to file the Form 3-AA long after the return, this Court has in effect permitted the assessee to make one option at the time of filing the return and change the option long thereafter, at any time before the assessment is made. That if such change of option could be permitted under Section 32(1)(ii-a), the case for permitting it is far stronger under Section 10B (8) where the statute itself expressly and unequivocally gives the assessee the right to change his option. It is submitted that the basic premise is that a substantive claim, which the assessee considers to be more beneficial, must be allowed to be made until the conclusion of assessment and the time within which any form which enables the claim should be filed, is only directory.

4.8 It is further submitted that this Court in G.M. Knitting (supra) has specifically approved the judgment of the Bombay High Court in the case of Commissioner of Income Tax v. Shivanand Electronics ((1994) 209 ITR 63). That judgment dealt with an assessee’s claim for deduction under Section 80HHC. Section 80HHC specifically prohibited the grant of deduction under Section 80HHC unless the stipulated audit report was filed along with the return of income. The assessee filed the required audit report long after the return. The Bombay High Court held that while the filing of the audit report was mandatory, the requirement that it should be filed along with the return was only directory, notwithstanding the peremptory language of the prohibition in Section 80HHC (5). It is of vital importance to note that there is no such prohibition in Section 10B. Further, as already pointed out, Section 10B (8) itself expressly gives the assessee the right to opt out of section 10B. This substantive statutory right cannot in law be nullified by construing the purely procedural time element requirement regarding the filing of the declaration under Section 10B (8) as mandatory. Reliance is placed on the judgment of the Telangana High Court in the case of Telangana State Pollution Board v. CBDT (Writ Petition No. 4834/2020, decided on 26.07.2021). 4.9 It is further submitted by the learned counsel appearing on behalf of the assessee that the submission on behalf of the revenue that by the impugned judgment and order and the interpretation by the High Court, the statutory option expressly given by Section 10B (8) is in effect nullified and that Section 10B (8) is rewritten by introducing in it a prohibition similar to Section 80HHC(5), though the legislature did not enact any such prohibition and it completely overlooks and ignores the legislative background of section 10B has no substance. It is urged that as such the issue involved in the present case is directly covered by the decision of the Delhi High Court in the case of Moser Baer (supra), against which a special leave petition was preferred in this Court and the same was dismissed as withdrawn. That the decision of Moser Baer (supra) has been subsequently followed in the case of CIT v. Rana Polycot Ltd. 2011 SCC OnLine P&H 17591. That both these judgments are on Section 10B itself and they clearly and unequivocally stated that while the submission of the declaration is mandatory, the requirement that it should be submitted before the due date of return is only directory and Section 10B deduction could not be disallowed if the declaration was filed before the assessment was made. 4.10 Shri Ganesh, learned counsel appearing on behalf of the assessee has submitted that there are a large number of judgments dealing with other sections of the IT Act which expressly provide that a particular deduction would not be allowed if a particular report or certificate of declaration was not filed along with the return of income. It is submitted that in each of the cases, it is held that the requirement of submission of the document is mandatory, but the stipulation that it should be filed along with the return of income is only directory. Shri Ganesh, learned counsel has referred to the following decisions:

i) Moser Baer (supra);
ii) Rana Polycot Ltd. (supra);
iii) G.M. Knitting Industries Pvt. Ltd. (supra);
iv) CIT v. Panama Chemical Works, 2006 SCC OnLine MP 704;
v) CIT v. Punjab Financial Corp. ILR 2002 (1) P&H 438;
vi) CIT v. Hardeodas Aggarwala Trust; 1991 SCC OnLine Cal.414;
vii) CIT v. Gupta Fabs, 2005 SCC OnLine P&H 1315;
viii) Murali Export House v. CIT, 1995 SCC OnLine Cal. 286;

ix) CIT v. Berger Paints India Ltd., 2002 SCC OnLine Cal.869; and
x) CIT v. Ramani Relators (P) Ltd., 2014 SCC OnLine Mad.12717.

It is submitted that therefore on the principle of stare decisis, this Court may not interfere with the impugned judgment and order passed by the High Court.

4.11 Now so far as the submission on behalf of the Revenue that Section 10B is an exemption provision, it is vehemently submitted by the learned counsel appearing on behalf of the assessee that as held by this Court in the case of CIT v. Yokogawa India Ltd. (2017) 2 SCC 1, Section 10B is a deduction provision and not an exemption provision. 4.12 Making the above submissions and relying upon the aforesaid decisions, it is prayed to dismiss the present appeal.

5. We have heard Shri Balbir Singh, learned ASG appearing on behalf of the Revenue and Shri S. Ganesh, learned Senior Advocate appearing on behalf of the assessee at length and perused the material on record.

The short question which is posed for consideration of this Court is, whether, for claiming exemption under Section 10B (8) of the IT Act, the assessee is required to fulfil the twin conditions, namely, (i) furnishing a declaration to the assessing officer in writing that the provisions of Section 10B (8) may not be made applicable to him; and (ii) the said declaration to be furnished before the due date of filing the return of income under sub-section (1) of Section 139 of the IT Act.

6. In the present case, the High Court as well as the ITAT have observed and held that for claiming the so-called exemption relief under Section 10B (8) of the IT Act, furnishing the declaration to the assessing officer is mandatory but furnishing the same before the due date of filing the original return of income is directory. In the present case, when the assessee submitted its original return of income under Section 139(1) of the IT Act on 31.10.2001, which was the due date for filing of the original return of income, the assessee specifically and clearly stated that it is a company and is a 100% export-oriented unit and entitled to claim exemption under Section 10B of the IT Act and therefore no loss is being carried forward. Along with the original return filed on 31.10.2001, the assessee also annexed a note to the computation of income clearly stating as above. However, thereafter the assessee filed the revised return of income under Section 139(5) of the IT Act on 23.12.2002 and filed a declaration under Section 10B (8) which admittedly was after the due date of filing of the original return under Section 139(1), i.e., 31.10.2001.

7. It is the case on behalf of the Revenue that as there was a non- compliance of twin conditions under Section 10B (8) of the IT Act, namely, the declaration under Section 10B (8) was not submitted along with the original return of income, the assessee shall not be entitled to the exemption/benefit under Section 10B (8) of the IT Act. According to the Revenue, furnishing of declaration under Section 10B (8) before the due date of filing original return of income is also mandatory. On the other hand, it is the case on behalf of the assessee, which has been accepted by the High Court, that the requirement of submission of declaration under Section 10B (8) is mandatory in nature, but the time limit within which the declaration is to be filed is directory in nature.

8. While considering the issue involved, whether the time limit within which the declaration is to be filed as provided under Section 10B (8) is mandatory or directory, Section 10B (8) is required to be referred to, which reads as under:

“10B (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of Section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years.” On a plain reading of Section 10B (8) of the IT Act as it is, i.e., “where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of Section 10B may not be made applicable to him, the provisions of Section 10B shall not apply to him for any of the relevant assessment years”, we note that the wording of the Section 10B (8) is very clear and unambiguous. For claiming the benefit under Section 10B (8), the twin conditions of furnishing the declaration to the assessing officer in writing and that the same must be furnished before the due date of filing the return of income under sub-section (1) of section 139 of the IT Act are required to be fulfilled and/or satisfied. In our view, both the conditions to be satisfied are mandatory. It cannot be said that one of the conditions would be mandatory and the other would be directory, where the words used for furnishing the declaration to the assessing officer and to be furnished before the due date of filing the original return of income under sub-section (1) of section 139 are same/similar. It cannot be disputed that in a taxing statute the provisions are to be read as they are and they are to be literally construed, more particularly in a case of exemption sought by an assessee.

9. In such a situation, filing a revised return under section 139(5) of the IT Act claiming carrying forward of losses subsequently would not help the assessee. In the present case, the assessee filed its original return under section 139(1) and not under section 139(3). Therefore, the Revenue is right in submitting that the revised return filed by the assessee under section 139(5) can only substitute its original return under Section 139(1) and cannot transform it into a return under Section 139(3), in order to avail the benefit of carrying forward or set-off of any loss under Section 80 of the IT Act. The assessee can file a revised return in a case where there is an omission or a wrong statement. But a revised return of income, under Section 139(5) cannot be filed, to withdraw the claim and subsequently claiming the carried forward or set- off of any loss. Filing a revised return under Section 139(5) of the IT Act and taking a contrary stand and/or claiming the exemption, which was specifically not claimed earlier while filing the original return of income is not permissible. By filing the revised return of income, the assessee cannot be permitted to substitute the original return of income filed under section 139(1) of the IT Act. Therefore, claiming benefit under section 10B (8) and furnishing the declaration as required under section 10B (8) in the revised return of income which was much after the due date of filing the original return of income under section 139(1) of the IT Act, cannot mean that the assessee has complied with the condition of furnishing the declaration before the due date of filing the original return of income under section 139(1) of the Act. As observed hereinabove, for claiming the benefit under section 10B (8), both the conditions of furnishing the declaration and to file the same before the due date of filing the original return of income are mandatory in nature.

10. Even the submission on behalf of the assessee that it was not necessary to exercise the option under section 10B (8) of the IT Act and even without filing the revised return of income, the assessee could have submitted the declaration in writing to the assessing officer during the assessment proceedings has no substance and the same cannot be accepted. Even the submission made on behalf of the assessee that filing of the declaration subsequently and may be during the assessment proceedings would have made no difference also has no substance. The significance of filing a declaration under section 10B (8) can be said to be co-terminus with filing of a return under section 139(1), as a check has been put in place by virtue of section 10B (5) to verify the correctness of claim of deduction at the time of filing the return. If an assessee claims an exemption under the Act by virtue of Section 10B, then the correctness of claim has already been verified under section 10B (5). Therefore, if the claim is withdrawn post the date of filing of return, the accountant’s report under section 10B (5) would become falsified and would stand to be nullified.

11. Now so far as the reliance placed upon the decision of this Court in the case of G.M. Knitting Industries Pvt. Ltd. (supra), relied upon by the learned counsel appearing on behalf of the assessee is concerned, Section 10B (8) is an exemption provision which cannot be compared with claiming an additional depreciation under section 32(1) (ii-a) of the Act. As per the settled position of law, an assessee claiming exemption has to strictly and literally comply with the exemption provisions. Therefore, the said decision shall not be applicable to the facts of the case on hand, while considering the exemption provisions. Even otherwise, Chapter III and Chapter VIA of the Act operate in different realms and principles of Chapter III, which deals with “incomes which do not form a part of total income”, cannot be equated with mechanism provided for deductions in Chapter VIA, which deals with “deductions to be made in computing total income”. Therefore, none of the decisions which are relied upon on behalf of the assessee on interpretation of Chapter VIA shall be applicable while considering the claim under Section 10B (8) of the IT Act.

12. Even the submission on behalf of the assessee that the assessee had a substantive statutory right under Section 10B (8) to opt out of Section 10B which cannot be nullified by construing the purely procedural time requirement regarding the filing of the declaration under Section 10B (8) as being mandatory also has no substance. As observed hereinabove, the exemption provisions are to be strictly and literally complied with and the same cannot be construed as procedural requirement.

13. So far as the submission on behalf of the assessee that against the decision of the Delhi High Court in the case of Moser Baer (supra), a special leave petition has been dismissed as withdrawn and the revenue cannot be permitted to take a contrary view is concerned, it is to be noted that the special leave petition against the decision of the Delhi High Court in the case of Moser Baer (supra) has been dismissed as withdrawn due to there being low tax effect and the question of law has specifically been kept open. Therefore, withdrawal of the special leave petition against the decision of the Delhi High Court in the case of Moser Baer (supra) cannot be held against the revenue.

14. In view of the above discussion and for the reasons stated above, we are of the opinion that the High Court has committed a grave error in observing and holding that the requirement of furnishing a declaration under Section 10B (8) of the IT Act is mandatory, but the time limit within which the declaration is to be filed is not mandatory but is directory. The same is erroneous and contrary to the unambiguous language contained in Section 10B (8) of the IT Act. We hold that for claiming the benefit under Section 10B (8) of the IT Act, the twin conditions of furnishing a declaration before the assessing officer and that too before the due date of filing the original return of income under section 139(1) are to be satisfied and both are mandatorily to be complied with. Accordingly, the question of law is answered in favour of the Revenue and against the assessee. The orders passed by the High Court as well as ITAT taking a contrary view are hereby set aside and it is held that the assessee shall not be entitled to the benefit under Section 10B (8) of the IT Act on non- compliance of the twin conditions as provided under Section 10B (8) of the IT Act, as observed hereinabove. The present Appeal is accordingly Allowed. However, in the facts and circumstances of the case, there shall be no order as to costs.

……………………………….J.

[M.R. SHAH]

NEW DELHI; ………………………………..J.
JULY 11, 2022. [B.V. NAGARATHNA]

A revised return u/s 139(5) can be filed only in a case where there is an omission or a wrong statement but not for withdrawing a claim: Supreme Court in Wipro

Posted on by staff
MASTI

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1449 OF 2022
(Arising out of SLP(Civil) No. 7620/2021)

Principal Commissioner of Income Tax-III,
Bangalore and another …Appellants

Versus

M/s Wipro Limited …Respondent

JUDGMENT
M.R. SHAH, J.

1. Feeling aggrieved and dissatisfied with the impugned judgment and order dated 30.11.2020 passed by the High Court of Karnataka at Bengaluru in Income Tax Appeal No. 462/2017, by which the High Court has dismissed the said appeal preferred by the Revenue and has confirmed the judgment and order dated 25.11.2016 passed by the Income Tax Appellate Tribunal, Bangalore Bench ‘C’, Bangalore (for short, ‘ITAT’), allowing the assessee’s claim for carry forward of losses under Section 72 of the Income Tax Act, 1961 (for short, ‘IT Act’), the Signature Not Verified Revenue has preferred the present appeal.

Digitally signed by SWETA BALODI Date: 2022.07.11 17:21:46 IST Reason:

2. The respondent-assessee is a 100% export-oriented unit and engaged in the business of running a call centre and IT Enabled and Remote Processing Services. Assessee filed its return of income on 31.10.2001 for Assessment Year 2001-2002, declaring loss of Rs.15,47,76,990/- and claimed exemption under Section 10B of the IT Act. Along with the original return filed on 31.10.2001, the assessee annexed a note to the computation of income in which the assessee clearly stated that the company is a 100% export-oriented unit and entitled to claim exemption under Section 10B of the IT Act and therefore no loss is being carried forward. That thereafter, the assessee filed a declaration dated 24.10.2002 before the Assessing Officer (AO) stating that the assessee does not want to avail the benefit under Section 10B of the IT Act for A.Y. 2001-02 as per Section 10B (8) of the IT Act. The assessee filed the revised return of income on 23.12.2002 wherein exemption under Section 10B of the IT Act was not claimed and the assessee claimed carry forward of losses.

2.1 Assessing Officer passed an order dated 31.03.2004 rejecting the withdrawal of exemption under Section 10B of the IT Act holding that the assessee did not furnish the declaration in writing before the due date of filing of return of income, which was 31.10.2001. Thereby, the AO made the addition in respect of denial of claim of carrying forward of losses under Section 72 of the IT Act.

2.2 Assessee filed an appeal before the Commissioner of Income Tax (Appeals), New Delhi (for short, ‘CIT(A)’). By order dated 19.01.2009, the CIT(A) upheld the order passed by the Assessing Officer making addition in respect of denial of claim of carrying forward of losses under Section 72 of the IT Act.

2.3 Aggrieved by the order passed by the CIT(A), the assessee filed an appeal before the ITAT. Vide order dated 25.11.2016, the ITAT decided the issue in favour of the assessee stating that the declaration requirement under Section 10B (8) of the IT Act was filed by the assessee before the AO before the due date of filing of return of income as per Section 139(1) of the IT Act. ITAT allowed the assessee’s claim for carrying forward of losses under Section 72 of the IT Act. 2.4 Feeling aggrieved and dissatisfied with the order passed by the ITAT, allowing the assessee’s claim for carrying forward of losses under Section 72 of the IT Act, the Revenue preferred an appeal before the High Court. By the impugned judgment and order, the High Court has dismissed the said appeal. Hence, the Revenue is before this Court by way of present appeal.

3. Shri Balbir Singh, learned Additional Solicitor General of India appearing for the Revenue has vehemently contended that in the present case, as the conditions mentioned in Section 10B (8) of the IT Act are not complied with, inasmuch as the declaration was not filed before the due date of filing of return, both, the ITAT and the High Court have committed a grave error in allowing the assessee’s claim for carrying forward of losses under Section 72 of the IT Act. 3.1 It is submitted that in the present case, the original return of income was filed on 31.10.2001, which was the due date for filing return of income. The assessee filed a declaration on 24.10.2002 before the AO stating that the assessee does not want to avail the benefit under Section 10B of the IT Act for A.Y. 2001-02. That thereafter the assessee filed the revised return of income on 23.12.2002 claiming carry forward of losses under Section 72 of the IT Act. It is submitted that therefore as the declaration required under Section 10B (8) of the IT Act was filed beyond the due date of filing of return and hence the assessee was not entitled to carry forward of losses under Section 72 of the IT Act. It is submitted that in the present case, the ITAT has wrongly noted that the declaration under Section 10B (8) of the IT Act was filed before the due date.

3.2 It is further contended that the High Court has erred in observing that the requirement under Section 10B (8) of the IT Act is a procedural requirement.

3.3 It is submitted that the High Court has not properly appreciated the consequences of not filing the declaration within the time as required under Section 10B (5) and non-compliance of Sections 10B (5) and 10B (8) of the IT Act. It is submitted that if the view taken by the High Court is accepted, in that case, it shall nullify the provisions of Sections 10B (5) and 10B (8) of the IT Act.

3.4 Shri Balbir Singh, learned ASG appearing on behalf of the Revenue further submitted that in the present case the assessee filed the revised return of income on 23.12.2002, wherein for the first time the assessee did not claim the exemption under Section 10B of the IT Act and claimed carrying forward of losses under Section 72 of the IT Act. That such a claim could not have been made while submitting the revised return of income. That the revised return of income can be filed under Section 139(5) of the IT Act only to remove the omission and mistake and/or correct the arithmetical error. It is submitted that the revised return of income under Section 139(5) of the IT Act cannot be filed for altogether a new claim. Reliance is placed on the decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax v. Andhra Cotton Mills Limited, [1996] 219 ITR 404 (AP). That in the aforesaid decision, the Andhra Pradesh High Court has held that a revised return under Section 139(5) can be filed only if there is an omission or a wrong statement. That in the aforesaid case, the assessee in the original return filed the P&L account containing provision for depreciation and did not opt for the option of not providing details regarding depreciation in its P&L account. Therefore, the High Court held that the intention of the assessee was to withdraw the claim for deduction of depreciation only to get a set-off and since particulars were furnished along with the original return, the ITO was bound to allow the deduction of depreciation in computing the income from business. 3.5 It is submitted that in the present case while filing the original return of income, the assessee specifically declared a loss of Rs. 15,47,76,990/- and claimed exemption under Section 10B of the IT Act. That as per the note annexed to the computation of income, annexed with the original return of income, the assessee specifically stated that “the company is registered as 100% export-oriented unit and is entitled to claim exemption under Section 10B of the IT Act. No loss is therefore being carried forward.” 3.6 It is submitted that as an afterthought the assessee filed a declaration as required under Section 10B (5) belatedly and after the due date mentioned in Section 10B (5) and claimed carry forward of losses under Section 72 of the IT Act, withdrawing its claim for deduction under Section 10B of the IT Act. It is contended that the High Court has not properly appreciated the fact that by filing a declaration subsequently and filing the revised return of income, the intent of the assessee was to frustrate the purpose of Section 10B of the IT Act and file a declaration under Section 10B (8) belatedly. It is submitted that the High Court has not properly appreciated the fact that the assessee’s intention to file the revised return was only as an afterthought and with the intention to extend the period of filing the declaration beyond the period specified in Section 10B (8) of the IT Act.

3.7 It is further submitted by learned ASG appearing on behalf of the Revenue that the High Court has seriously erred in observing that the requirement of submission of declaration under Section 10B (8) is mandatory in nature, but the time limit within which the declaration is to be filed is directory in nature, as the provision does not provide for any adverse consequence for not filing of the declaration by the time limit. It is submitted that the High Court has not properly appreciated and/or considered the fact that non-filing of declaration before the due date, i.e., filing of the return of income would result in denial of the benefit under Section 10B (8) of the IT Act. Therefore, it cannot be said that there is no consequence of not filing of declaration before the due date of return of income.

3.8 It is contended that the High Court has materially erred in following and relying upon the decision of the Delhi High Court in the case of Commissioner of Income Tax, Delhi-III, New Delhi v. Moser Baer India Limited, decided on 14.05.2008 in ITA No. 950/2007, wherein it was considering the requirement of Section 10B (7) of the IT Act. 3.9 It is next contended that there is a clear distinction between the provisions seeking exemption and the provisions for deduction. That Chapter III of the IT Act deals with exemptions. However, Chapter VIA deals with deductions. That Section 10B of the IT Act is an exemption provision and the condition for seeking an exemption is required to be complied with strictly with the provision.

3.10 Learned ASG submitted that as held by this Court in a catena of cases that a taxing statute should be strictly construed and that the machinery provisions must be so construed to effectuate the object and purpose of statute and that the exemption provisions must be construed strictly and by a strict interpretation. Reliance is placed on the judgments of this Court in the case of Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 and Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others (2018) 9 SCC 1.

3.10 Making the above submissions and relying upon the aforesaid decisions, it is prayed to allow the present appeal.

4. The present appeal is vehemently opposed by Shri S. Ganesh, learned Senior Advocate appearing on behalf of the respondent – assessee.

4.1 Learned counsel appearing on behalf of the assessee has submitted that the only question of law which arises in the present case is with regard to the interpretation of Section 10B (8) of the IT Act, viz., whether the requirement of submission of the declaration before the last date for submission of the return is mandatory or directory. It is submitted that on a true interpretation of Sections 10B (5) and 10B (8) of the IT Act, the High Court has rightly observed and held that the requirement of filing a declaration is mandatory in nature, while the time limit in filing the declaration is directory in nature. It is submitted that the High Court has rightly held the requirement of filing the declaration by the time limit directory as non-filing of the declaration within the time limit does not envisage any consequence. It is urged that the High Court has rightly relied upon the decision of the Delhi High Court in the case of Moser Baer (supra). It is submitted that the issues of validity of the revised return of income; whether the respondent was entitled to carry forward its losses under Sections 10B and 80 of the IT Act; and whether the assessee had duly complied with Section 80 and Section 10B (5) of the IT Act were not raised before the High Court.

4.2 It is submitted that apart from the above, even on merits also, the Revenue has no case. This is because Section 80 of the IT Act only requires that an assessee claiming carry forward of loss should file a return showing the loss before the last date for submitting the return. It is submitted that in the instant case the assessee filed the original return in time declaring the loss and thereby complied with Section 80 of the IT Act.

4.3 It is further submitted that though it was not necessary for the exercise of option under Section 10B (8) of the IT Act, the assessee filed a revised return only to bring to the notice of the AO the factum of exercise of option under Section 10B. Even if the revised return had not been filed and instead, the assessee had submitted the declaration in writing to the AO during the assessment proceedings, it would have made no difference whatsoever to the exercise of option under Section 10B (8) of the IT Act. It is submitted that therefore the validity of the revised return is wholly immaterial and irrelevant. 4.4 It is further submitted that the accountant’s certificate under Section 10B (5) is required only if the assessee claims the deduction under Section 10B. This certificate only certifies the profit/loss of Section 10B unit and the amount of deduction under Section 10B (1), if any. The certificate, if already submitted, becomes irrelevant if the claim is withdrawn under Section 10B. In any event, the contents of this certificate regarding profit/loss are not in any way affected by the withdrawal of the Section 10B claim. It is submitted that in the present case, the loss set out in Section 10B certificate remained exactly the same after withdrawal of the claim made under Section 10B and the respondent making the claim for carry forward of loss. It is submitted that there was no claim for any deduction under Section 10B (1) at any time.

4.5 It is submitted that the incontrovertible position set out in paragraphs 4.2 to 4.4 above is the precise reason why these points were not even attempted to be raised, either before the ITAT or before the High Court, and are sought to be raised before this Court for the first time and without disclosing the correct and complete facts. 4.6 It is further submitted by Shri S. Ganesh, learned counsel appearing on behalf of the assessee that on interpretation of Section 10B (8) of the IT Act, the case is squarely covered by the judgment of this Court in the case of CIT, Maharashtra v. G.M. Knitting Industries Pvt. Ltd. (2016) 12 SCC 272. It is submitted that the case involved a claim for additional depreciation on plant and machinery under Section 32(1) (ii-a) of the IT Act. That provision gave the assessee the option to claim additional depreciation, over and above the usual or ordinary depreciation mandatorily allowed under Section 32(1) of the IT Act. This option had to be exercised by the assessee by filing a statutory Form 3- AA along with the Return of Income, which gave details of the plant and machinery and also a certificate that the claim for additional depreciation was correctly made. Therefore, if the said Form 3-AA was not filed with the Return, it was a clear indication that the assessee had opted not to claim additional depreciation. In the case of G.M. Knitting (supra), the assessee did not file Form 3-AA along with the return of income, but chose to file the Form much later, but before the passing of the assessment order, which may be passed as long as 26 months after the return was filed as provided under Section 153(1) of the IT Act. The Revenue rejected the form on the ground that it had not been filed along with the return of income and declined to grant additional depreciation as claimed by the assessee. It is submitted that this Court held that the requirement that Form 3-AA should be submitted along with return was only directory and that therefore even though the Form had been submitted long after the filing of the return, the assessee was entitled to claim additional depreciation under Section 32(1)(ii-a) of the IT Act. 4.7 It is submitted that exactly the same principle applies to the interpretation of Section 10B (8) of the IT Act. Section 10B (8) enables an assessee to exclude the applicability of the deduction under Section 10B by filing a declaration to that effect before the last date in which the return of income is required to be filed. It is submitted that as held in G.M. Knitting (supra), the requirement that the Form should be submitted by a certain deadline is directory, though the submission of the Form itself may be regarded as mandatory. It is urged that the present case stands on a far stronger footing and on a far higher pedestal as compared to G.M. Knitting (supra). This is because Section 10B (8) specifically and unequivocally gives the assessee a statutory right to exercise his option and to decide not to avail of the benefit of section 10B (8) in a particular Assessment Year. For the purpose of Section 32(1)(ii-a) of the IT Act, by permitting the assessee to file the Form 3-AA long after the return, this Court has in effect permitted the assessee to make one option at the time of filing the return and change the option long thereafter, at any time before the assessment is made. That if such change of option could be permitted under Section 32(1)(ii-a), the case for permitting it is far stronger under Section 10B (8) where the statute itself expressly and unequivocally gives the assessee the right to change his option. It is submitted that the basic premise is that a substantive claim, which the assessee considers to be more beneficial, must be allowed to be made until the conclusion of assessment and the time within which any form which enables the claim should be filed, is only directory.

4.8 It is further submitted that this Court in G.M. Knitting (supra) has specifically approved the judgment of the Bombay High Court in the case of Commissioner of Income Tax v. Shivanand Electronics ((1994) 209 ITR 63). That judgment dealt with an assessee’s claim for deduction under Section 80HHC. Section 80HHC specifically prohibited the grant of deduction under Section 80HHC unless the stipulated audit report was filed along with the return of income. The assessee filed the required audit report long after the return. The Bombay High Court held that while the filing of the audit report was mandatory, the requirement that it should be filed along with the return was only directory, notwithstanding the peremptory language of the prohibition in Section 80HHC (5). It is of vital importance to note that there is no such prohibition in Section 10B. Further, as already pointed out, Section 10B (8) itself expressly gives the assessee the right to opt out of section 10B. This substantive statutory right cannot in law be nullified by construing the purely procedural time element requirement regarding the filing of the declaration under Section 10B (8) as mandatory. Reliance is placed on the judgment of the Telangana High Court in the case of Telangana State Pollution Board v. CBDT (Writ Petition No. 4834/2020, decided on 26.07.2021). 4.9 It is further submitted by the learned counsel appearing on behalf of the assessee that the submission on behalf of the revenue that by the impugned judgment and order and the interpretation by the High Court, the statutory option expressly given by Section 10B (8) is in effect nullified and that Section 10B (8) is rewritten by introducing in it a prohibition similar to Section 80HHC(5), though the legislature did not enact any such prohibition and it completely overlooks and ignores the legislative background of section 10B has no substance. It is urged that as such the issue involved in the present case is directly covered by the decision of the Delhi High Court in the case of Moser Baer (supra), against which a special leave petition was preferred in this Court and the same was dismissed as withdrawn. That the decision of Moser Baer (supra) has been subsequently followed in the case of CIT v. Rana Polycot Ltd. 2011 SCC OnLine P&H 17591. That both these judgments are on Section 10B itself and they clearly and unequivocally stated that while the submission of the declaration is mandatory, the requirement that it should be submitted before the due date of return is only directory and Section 10B deduction could not be disallowed if the declaration was filed before the assessment was made. 4.10 Shri Ganesh, learned counsel appearing on behalf of the assessee has submitted that there are a large number of judgments dealing with other sections of the IT Act which expressly provide that a particular deduction would not be allowed if a particular report or certificate of declaration was not filed along with the return of income. It is submitted that in each of the cases, it is held that the requirement of submission of the document is mandatory, but the stipulation that it should be filed along with the return of income is only directory. Shri Ganesh, learned counsel has referred to the following decisions:

i) Moser Baer (supra);
ii) Rana Polycot Ltd. (supra);
iii) G.M. Knitting Industries Pvt. Ltd. (supra);
iv) CIT v. Panama Chemical Works, 2006 SCC OnLine MP
704;
v) CIT v. Punjab Financial Corp. ILR 2002 (1) P&H 438;
vi) CIT v. Hardeodas Aggarwala Trust; 1991 SCC OnLine
Cal.414;
vii) CIT v. Gupta Fabs, 2005 SCC OnLine P&H 1315;
viii) Murali Export House v. CIT, 1995 SCC OnLine Cal. 286;

ix) CIT v. Berger Paints India Ltd., 2002 SCC OnLine Cal.

869; and
x) CIT v. Ramani Relators (P) Ltd., 2014 SCC OnLine Mad.

12717.

It is submitted that therefore on the principle of stare decisis, this Court may not interfere with the impugned judgment and order passed by the High Court.

4.11 Now so far as the submission on behalf of the Revenue that Section 10B is an exemption provision, it is vehemently submitted by the learned counsel appearing on behalf of the assessee that as held by this Court in the case of CIT v. Yokogawa India Ltd. (2017) 2 SCC 1, Section 10B is a deduction provision and not an exemption provision. 4.12 Making the above submissions and relying upon the aforesaid decisions, it is prayed to dismiss the present appeal.

5. We have heard Shri Balbir Singh, learned ASG appearing on behalf of the Revenue and Shri S. Ganesh, learned Senior Advocate appearing on behalf of the assessee at length and perused the material on record.

The short question which is posed for consideration of this Court is, whether, for claiming exemption under Section 10B (8) of the IT Act, the assessee is required to fulfil the twin conditions, namely, (i) furnishing a declaration to the assessing officer in writing that the provisions of Section 10B (8) may not be made applicable to him; and (ii) the said declaration to be furnished before the due date of filing the return of income under sub-section (1) of Section 139 of the IT Act.

6. In the present case, the High Court as well as the ITAT have observed and held that for claiming the so-called exemption relief under Section 10B (8) of the IT Act, furnishing the declaration to the assessing officer is mandatory but furnishing the same before the due date of filing the original return of income is directory. In the present case, when the assessee submitted its original return of income under Section 139(1) of the IT Act on 31.10.2001, which was the due date for filing of the original return of income, the assessee specifically and clearly stated that it is a company and is a 100% export-oriented unit and entitled to claim exemption under Section 10B of the IT Act and therefore no loss is being carried forward. Along with the original return filed on 31.10.2001, the assessee also annexed a note to the computation of income clearly stating as above. However, thereafter the assessee filed the revised return of income under Section 139(5) of the IT Act on 23.12.2002 and filed a declaration under Section 10B (8) which admittedly was after the due date of filing of the original return under Section 139(1), i.e., 31.10.2001.

7. It is the case on behalf of the Revenue that as there was a non- compliance of twin conditions under Section 10B (8) of the IT Act, namely, the declaration under Section 10B (8) was not submitted along with the original return of income, the assessee shall not be entitled to the exemption/benefit under Section 10B (8) of the IT Act. According to the Revenue, furnishing of declaration under Section 10B (8) before the due date of filing original return of income is also mandatory. On the other hand, it is the case on behalf of the assessee, which has been accepted by the High Court, that the requirement of submission of declaration under Section 10B (8) is mandatory in nature, but the time limit within which the declaration is to be filed is directory in nature.

8. While considering the issue involved, whether the time limit within which the declaration is to be filed as provided under Section 10B (8) is mandatory or directory, Section 10B (8) is required to be referred to, which reads as under:

“10B (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of Section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years.” On a plain reading of Section 10B (8) of the IT Act as it is, i.e., “where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of Section 10B may not be made applicable to him, the provisions of Section 10B shall not apply to him for any of the relevant assessment years”, we note that the wording of the Section 10B (8) is very clear and unambiguous. For claiming the benefit under Section 10B (8), the twin conditions of furnishing the declaration to the assessing officer in writing and that the same must be furnished before the due date of filing the return of income under sub-section (1) of section 139 of the IT Act are required to be fulfilled and/or satisfied. In our view, both the conditions to be satisfied are mandatory. It cannot be said that one of the conditions would be mandatory and the other would be directory, where the words used for furnishing the declaration to the assessing officer and to be furnished before the due date of filing the original return of income under sub-section (1) of section 139 are same/similar. It cannot be disputed that in a taxing statute the provisions are to be read as they are and they are to be literally construed, more particularly in a case of exemption sought by an assessee.

9. In such a situation, filing a revised return under section 139(5) of the IT Act claiming carrying forward of losses subsequently would not help the assessee. In the present case, the assessee filed its original return under section 139(1) and not under section 139(3). Therefore, the Revenue is right in submitting that the revised return filed by the assessee under section 139(5) can only substitute its original return under Section 139(1) and cannot transform it into a return under Section 139(3), in order to avail the benefit of carrying forward or set-off of any loss under Section 80 of the IT Act. The assessee can file a revised return in a case where there is an omission or a wrong statement. But a revised return of income, under Section 139(5) cannot be filed, to withdraw the claim and subsequently claiming the carried forward or set- off of any loss. Filing a revised return under Section 139(5) of the IT Act and taking a contrary stand and/or claiming the exemption, which was specifically not claimed earlier while filing the original return of income is not permissible. By filing the revised return of income, the assessee cannot be permitted to substitute the original return of income filed under section 139(1) of the IT Act. Therefore, claiming benefit under section 10B (8) and furnishing the declaration as required under section 10B (8) in the revised return of income which was much after the due date of filing the original return of income under section 139(1) of the IT Act, cannot mean that the assessee has complied with the condition of furnishing the declaration before the due date of filing the original return of income under section 139(1) of the Act. As observed hereinabove, for claiming the benefit under section 10B (8), both the conditions of furnishing the declaration and to file the same before the due date of filing the original return of income are mandatory in nature.

10. Even the submission on behalf of the assessee that it was not necessary to exercise the option under section 10B (8) of the IT Act and even without filing the revised return of income, the assessee could have submitted the declaration in writing to the assessing officer during the assessment proceedings has no substance and the same cannot be accepted. Even the submission made on behalf of the assessee that filing of the declaration subsequently and may be during the assessment proceedings would have made no difference also has no substance. The significance of filing a declaration under section 10B (8) can be said to be co-terminus with filing of a return under section 139(1), as a check has been put in place by virtue of section 10B (5) to verify the correctness of claim of deduction at the time of filing the return. If an assessee claims an exemption under the Act by virtue of Section 10B, then the correctness of claim has already been verified under section 10B (5). Therefore, if the claim is withdrawn post the date of filing of return, the accountant’s report under section 10B (5) would become falsified and would stand to be nullified.

11. Now so far as the reliance placed upon the decision of this Court in the case of G.M. Knitting Industries Pvt. Ltd. (supra), relied upon by the learned counsel appearing on behalf of the assessee is concerned, Section 10B (8) is an exemption provision which cannot be compared with claiming an additional depreciation under section 32(1) (ii-a) of the Act. As per the settled position of law, an assessee claiming exemption has to strictly and literally comply with the exemption provisions. Therefore, the said decision shall not be applicable to the facts of the case on hand, while considering the exemption provisions. Even otherwise, Chapter III and Chapter VIA of the Act operate in different realms and principles of Chapter III, which deals with “incomes which do not form a part of total income”, cannot be equated with mechanism provided for deductions in Chapter VIA, which deals with “deductions to be made in computing total income”. Therefore, none of the decisions which are relied upon on behalf of the assessee on interpretation of Chapter VIA shall be applicable while considering the claim under Section 10B (8) of the IT Act.

12. Even the submission on behalf of the assessee that the assessee had a substantive statutory right under Section 10B (8) to opt out of Section 10B which cannot be nullified by construing the purely procedural time requirement regarding the filing of the declaration under Section 10B (8) as being mandatory also has no substance. As observed hereinabove, the exemption provisions are to be strictly and literally complied with and the same cannot be construed as procedural requirement.

13. So far as the submission on behalf of the assessee that against the decision of the Delhi High Court in the case of Moser Baer (supra), a special leave petition has been dismissed as withdrawn and the revenue cannot be permitted to take a contrary view is concerned, it is to be noted that the special leave petition against the decision of the Delhi High Court in the case of Moser Baer (supra) has been dismissed as withdrawn due to there being low tax effect and the question of law has specifically been kept open. Therefore, withdrawal of the special leave petition against the decision of the Delhi High Court in the case of Moser Baer (supra) cannot be held against the revenue.

14. In view of the above discussion and for the reasons stated above, we are of the opinion that the High Court has committed a grave error in observing and holding that the requirement of furnishing a declaration under Section 10B (8) of the IT Act is mandatory, but the time limit within which the declaration is to be filed is not mandatory but is directory. The same is erroneous and contrary to the unambiguous language contained in Section 10B (8) of the IT Act. We hold that for claiming the benefit under Section 10B (8) of the IT Act, the twin conditions of furnishing a declaration before the assessing officer and that too before the due date of filing the original return of income under section 139(1) are to be satisfied and both are mandatorily to be complied with. Accordingly, the question of law is answered in favour of the Revenue and against the assessee. The orders passed by the High Court as well as ITAT taking a contrary view are hereby set aside and it is held that the assessee shall not be entitled to the benefit under Section 10B (8) of the IT Act on non- compliance of the twin conditions as provided under Section 10B (8) of the IT Act, as observed hereinabove. The present Appeal is accordingly Allowed. However, in the facts and circumstances of the case, there shall be no order as to costs.

……………………………….J.

[M.R. SHAH]

NEW DELHI; ………………………………..J.
JULY 11, 2022. [B.V. NAGARATHNA]

Taxability of capital gains from penny stocks: Burden is on the taxpayer to prove fanciful rise in stock price is genuine

Posted on by staff
MASTI

ITAT NO. 06 OF 2022 AND ETC. BATCH

IN THE HIGH COURT OF JUDICATURE AT CALCUTTA
SPECIAL JURISDICTION (INCOME TAX)
ORIGINAL SIDE

RESERVED ON: 12.05.2022
DELIVERED ON: 14.06.2022

CORAM:

THE HON’BLE MR. JUSTICE T.S. SIVAGNANAM

AND

THE HON’BLE MR. JUSTICE HIRANMAY BHATTACHARYYA

IA NO. GA/2/2022

IN ITAT/6/2022
PRINCIPAL COMMISSIONER OF INCOME TAX FIVE, KOLKATA
VERSUS
SWATI BAJAJ

IA NO. GA/2/2020 (OLD NO: GA/1044/2020)
IN ITAT/31/2020

PRINCIPAL COMMISSIONER OF INCOME TAX-15, KOLKATA
VERSUS
DINESH KUMAR BANSAL (HUF)

IA NO. GA/2/2020
IN ITAT/41/2020
PRINCIPAL COMMISSIONER OF INCOME TAX CENTRAL -1, KOLKATA
VERSUS
SURAJ SAHANA

Page 1 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

ITAT/42/2020
IA NO. GA/2/2020
PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL-I, KOLKATA
VERSUS
TAPATI SAHANA

IA NO. GA/2/2020
IN ITAT/43/2020
PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL-1, KOLKATA
VERSUS
SOUVIK SAHANA

IA NO. GA/2/2020
IN ITAT/44/2020
PRINCIPAL COMMISSIONER OF INCOME TAX-12, KOLKATA
VERSUS
MUKTA AGARWAL

ITAT/64/2020
IA NO: GA/2/2020
PRINCIPAL COMMISSIONER OF INCOME TAX-15, KOLKATA
VERSUS
SMT. BABITA AGARWAL

IA NO. GA/2/2021
IN ITAT/3/2021
PRINCIPAL COMMISSIONER OF INCOME TAX SILIGURI
VERSUS
NEETU AGARWAL

Page 2 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

IA NO. GA/2/2021
IN ITAT/22/2021
PRINCIPAL COMMISSIONER OF INCOME TAX
VERSUS
NAND KISHORE AGARWALA

IA NO. GA/2/2021
IN ITAT/26/2021
PRINCIPAL COMMISSIONER OF INCOME TAX ASANSOL, KOLKATA
VERSUS
RAJESH JHUNJHUNWALA

IA NO. GA/2/2021
IN ITAT/27/2021
PRINCIPAL COMMISSIONER OF INCOME TAX ASANSOL, KOLKATA
VERSUS
RAKESH JHUNJHUNWALA

ITAT/28/2021
IA NO: GA/2/2021
PR CIT SILIGURI
VERSUS
MANGILAL JAIN

IA NO. GA/2/2021
IN ITAT/34/2021
PRINCIPAL COMMISSIONER OF INCOME TAX 13, KOLKATA
VERSUS
SMT GANAPATI DEVI AGARWAL

Page 3 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

IA NO. GA/2/2021
IN ITAT/36/2021
PRINCIPAL COMMISSIONER OF INCOME TAX, SILIGURI
VERSUS
NITIN KUMAR AGARWAL

ITAT/57/2021
IA NO: GA/2/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
JEMISH SHAH

IA NO. GA/2/2021
IN ITAT/58/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
SONAL SARAF

IA NO. GA/2/2021
IN ITAT/60/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
RAMAKANT BERIWALA

IA NO. GA/2/2021
IN ITAT/76/2021
PRINCIPAL COMMISSIONER OF INCOME TAX
VERSUS
MUKESH SARAOGI (HUF)

Page 4 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

IA NO. GA/2/2021
IN ITAT/78/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
SUNITA GOYAL

IA NO. GA/2/2021
IN ITAT/80/2021
PRINCIPAL COMMISSIONER OF INCOME TAX, KOLKATA-5
VERSUS
RANJIKA GUPTA

ITAT/85/2021
IA NO: GA/2/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-18, KOLKATA
VERSUS
SRI VIKASH GOEL

ITAT/87/2021
IA NO: GA/2/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
POOJA JHUNJHUNWALA

IA NO. GA/2/2021
IN ITAT/88/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
AAYUSH JHUNJHUNWALA

Page 5 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

IA NO. GA/2/2021
IN ITAT/89/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
Vs
AAYUSH JHUNJHUNWALA HUF

IA NO. GA/2/2021
IN ITAT/101/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
SMT. SHILPA DAULAT

IA NO. GA/2/2021
IN ITAT/103/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-18, KOLKATA
VERSUS
M/S.PREM BALA PUROHIT

IA NO. GA/2/2021
IN ITAT/122/2021
PRINCIPAL COMMISSIONER OF INCOME TAX, BURDWAN
VERSUS
BIJAYA TAH

IA NO. GA/2/2021
IN ITAT/128/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
SUMAN KUMAR

Page 6 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

IA NO. GA/2/2021
IN ITAT/129/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
SAJJADBHAI NURUDDIN NANDARBARWAL

IA NO. GA/2/2021
IN ITAT/130/2021
PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL-1, KOLKATA
VERSUS
KRISHNA KUMAR PARSURAMKA

IA NO. GA/2/2021
IN ITAT/136/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-5, KOLKATA
VERSUS
SHRI MAHENDRA KUMAR PERIWAL

IA NO. GA/2/2021
IN ITAT/138/2021
PRINCIPAL COMMISSIONER OF INCOME TAX, SILIGURI
Vs
PRAKASHO DEVI SARIA

IA NO. GA/2/2021
IN ITAT/139/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-SILIGURI
VERSUS
SHEKHAR AGARWAL

Page 7 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

IA NO. GA/2/2021
IN ITAT/150/2021
PRINCIPAL COMMISSIONER OF INCOME TAX 9, KOLKATA
VERSUS
PUSPA DEVI TIKMANI

IA NO. GA/2/2021
IN ITAT/151/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-9, KOLKATA
VERSUS
GOPAL PRASAD TIKMANI

IA NO. GA/2/2021
IN ITAT/152/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-9, KOLKATA
VERSUS
M/S GITESH TIKMANI HUF

IA NO. GA/2/2021
IN ITAT/153/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-9, KOLKATA
VERSUS
M/S. GOPAL PRASAD TIKMANI HUF

IA NO. GA/2/2021
IN ITAT/154/2021
PRINCIPAL COMMISSIONER OF INCOME TAX-9, KOLKATA
VERSUS
GITESH TIKMANI

Page 8 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

IA NO. GA/2/2021
IN ITAT/155/2021
PR CIT 9, KOLKATA
VERSUS
MANISHA TIKMANI

IA NO. GA/2/2021
IN ITAT/156/2021
PR CIT 9, KOLKATA
VERSUS
GIRISH TIKMANI

IA NO. GA/2/2021
IN ITAT/157/2021
PRINCIPAL COMMISSIONER OF INCOME TAX 9, KOLKATA
VERSUS
M/S GIRISH TIKMANI HUF

IA NO. GA/2/2021
IN ITAT/168/2021
PRINCIPAL COMMISSIONER OF INCOME TAX, SILIGURI
Vs
SRI SATYA NARAYAN SARIA

Appearance:-
Mr. Vipul Kundalia, Adv.
Mr. Smarajit Roychowdhury, Adv.
Mr. Aryak Dutta, Adv.
Mr. Tilak Mitra, Adv.
Mr. Om Narayan Rai, Adv.
Mr. Prithu Dhudhoria, Adv.
Mr. Amit Sharma, Adv.
Mr. Soumen Bhattacharya, Adv.
…..For the Appellant.

Page 9 of 150
ITAT NO. 06 OF 2022 AND ETC. BATCH

Mr. S.M. Surana, Sr. Adv.
Mr. Saurabh Bagaria, Adv.
Mr. Avra Mazumdar, Adv.
Mr. Subash Agarwal, Adv.
Mr. Soumya Kejriwal, Adv.
Mr. Pratyush Jhunjhunwala, Adv.
Mr. Varun Kedia, Adv.
Mr. Brijesh Kumar Singh, Adv.
Mr. G.S. Gupta, Adv.
Mr. Bhaskar Sengupta, Adv.
Mr. Binayak Gupta, Adv.
Sk. Md. Bilwal Hossain, Adv.
Mr. K. Roy, Adv.
Mr. Arif Ali, Adv.
…..For the Respondent.

JUDGMENT
(Judgment of the Court was delivered by T.S.SIVAGNANAM, J.)

1. These appeals filed by the revenue under Section 260 A of the Income Tax Act 1961 (the Act of brevity) are directed against the common order dated 26.06.2019 passed by the Income Tax Appellate Tribunal (Single Member Bench), Kolkata in a batch of 90 appeals. The respondents in these appeals are the assessees. The assessments were completed by the respective assessing officers by passing individual orders in respect of each of the assessees, and the assessees had filed individual appeals before the Commissioner of Income Tax (Appeals), [CIT(A)], who has also passed individual orders in each of the assessee’s case affirming the order passed by the respective assessing officers disallowing the claim of the Long Term Capital Gains (LTCG), the assessees have filed appeals before the Tribunal which have been allowed by common order dated 26.06.2019 which is impugned in these appeals. The Learned Tribunal has not discussed the ITAT NO. 06 OF 2022 AND ETC. BATCH merits of each and every case of the assessee but though fit to follow its earlier decision in the case of Swati Bajaj Versus ITO for the assessment year 2014-2015 in ITA NO.2623/Kol/2018. In certain other cases the Tribunal has followed other earlier orders of Coordinate Bench of the Tribunal which was also decided broadly on the same lines of Swati Bajaj. The revenue has preferred appeals against the common order passed by the Tribunal and the grounds raised are all identical and as against the lead case, the revenue has preferred ITAT No. 06 of 2022 .Thus, in absence of any separate findings rendered by the Tribunal in respect of each of the assessee’s case, which is not disputed by the Learned Advocates appearing for the assessees, by consent of the Learned Advocates on either side ITAT No. 06 of 2022 is taken as the lead case where the assessee is Mrs. Swati Bajaj. Therefore, we propose to note the facts in the lead case and then proceed to discuss the issues canvassed before us and take a common decision in all the appeals.

2. The revenue in ITAT No. 6/2022 has raised the following substantial questions of law for consideration:-

(i) Whether on the facts and circumstances of the case and in law the Learned Income Tax Appellate Tribunal erred in ignoring the direct and circumstantial evidence brought on record by the Assessing Officer to establish that the assessee had indulged in manipulation of the share prices of Surabhi Chemicals and Investment Limited with a view to record fictitious Long Term Capital Gains of Rs. 28,23,500/- claiming these as exempt from taxation.
(ii) Whether on the facts and circumstances of the case and in law the order of the Learned Income Tax Appellate Tribunal suffers from perversity as it ignores the facts brought on record establishing manipulation of share prices Surabhi ITAT NO. 06 OF 2022 AND ETC. BATCH Chemicals and Investment Limited as part of colourable device to generate fictitious LTCG with the aim to evade taxes due.
(iii) Whether on the facts and circumstances of the case and in law the Learned Income Tax Appellate Tribunal erred in deleting the disallowance of Long Term Capital Gains of Rs. 28,23,500/- overlooking the fact that the entire transactions were stage managed with the object to facilitate the assessee to plough back its unaccounted income in the form of fictitious Long Term Capital Gains of Rs. 28,23,500/- and claim bogus exemption.

(iv) Whether on the facts and circumstances of the case the Learned Income Tax Appellate Tribunal erred in deleting the disallowance of commission of Rs. 14,118/- purportedly incurred by the assessee towards payment to brokers who allegedly entered into the share transactions at the behest of the assessee overlooking the fact that the entire transaction were stage managed with the object to facilitate the assessee to plough back its unaccounted income in the form of fictitious Long Term Capital Gains of Rs.28,23,500/- and claim bogus exemption, thereby giving rise to the vice of flaw in the decision making process.

3. The assessee in the lead case, Mrs. Swati Bajaj filed the return of income for the assessment year 2014-2015 declaring a total income of Rs. 6,57,300/-.The return was selected for scrutiny and notice under Section 143 (2) of the Act and under Section 142 (1) of the Act were issued to the assessee. The assessee was represented by her advocate before the assessing officer who had submitted documents in compliance with the notice issued under Section 142 (1) of the Act. The assessee is stated to have produced the copy of the income tax returns, profit and loss account, ITAT NO. 06 OF 2022 AND ETC. BATCH balance sheet, computation of total income, statement of STCG/LTCG, D- Mat account, contract notes, bank statements and other details. The assessing officer after scrutiny of the documents produced, directed the assessee to submit the details of shares purchased and sold during the year under consideration and immediate three preceding years in respect of STT paid in LTCG/STCG and was directed to explain with evidence that the transactions were genuine as the assessee had earned LTCG. On verification of the computation of income the assessing officer noted that the assessee had shown long term capital gain of Rs. 28,23,500/- and claimed the same as exempt. The assessee was directed to file complete details as well as the evidence with respect to such claim of exempt income. The assessee filed copy of contract notes in support of purchase and sale of shares of Surabhi Chemicals on which the long-term capital gains was claimed. From the details furnished by the assessee, it was seen that the assessee had purchased 50,000 shares of the company for Rs. 1,00,000/- on 16.03.2012 and 14.08.2012. Soon after the expiry of the period to become eligible for long term capital gains, the assessee sold those shares for Rs. 29,23,500/- and such sales were effected during the period from 04.12.2013 to 07.12.2013 and the long term capital gains (LTCG) was computed for the Rs. 28,23,500/-. The assessing officer noted that within a short span to time of 17 to 21 months, the assessee managed to sell the shares with increased value of about 2823% that to when the general market trend was recessive. It appears that there were several such transactions which led to an investigation being commenced by the Directorate of Income Tax Investigation, Kolkata. A report in this regard was submitted by the Deputy ITAT NO. 06 OF 2022 AND ETC. BATCH Director of Income Tax Investigation, Unit – II (3), Kolkata dated 27.04.2015 which report was furnished to the Director General of Income Tax Investigation in Mumbai, Delhi, Ahmedabad, Bengaluru, Bhopal, Chandigarh, Chennai, Delhi, Hyderabad, Jaipur, Kochi, Kolkata, Lucknow, Patna, Pune and Director General (International Taxation) Mumbai. The investigation report dated 27.04.2015, which is available in the public domain narrates the modus operandi adopted for the purpose of claiming bogus LTCG. The stocks which were the subject matter of transaction were referred to as “penny stocks” and the companies whose shares were traded in the various stocks exchanges and it is reported that the figure of total transaction of the brokers is little more than Rs. 15,970 crores as against the total trade in the scripts which is more than Rs. 38,000 crores. The report further states that the cash trail has been established from the cash deposit accounts to the account of the beneficiary for a sum of more than Rs. 1,575 crores. The broker wise split up have been furnished. The modus operandi has been set out in the report, the types of penny stocks companies, the entities involved in the transactions, the different stages of the transactions, the merger method which was adopted and also mentioning about that large number of non-resident Indians and many well known foreign investors are buying or selling these penny stocks and it appears to be a case of black money cash stashed abroad coming back to India (purchase) or money be sent out of the country (sale). Further the report states that while little over Rs. 27.57 crores has gone out of the country while the amount which has come in is more than Rs. 114.97 crores. The report further states that in the whole project total 84 BSE listed ITAT NO. 06 OF 2022 AND ETC. BATCH penny stocks have been identified after which several search and survey operations were conducted in office premises of more than 32 share broking entities who have accepted that they were actively involved in bogus LTCL/STCL scam. Surveys were also conducted in the office premises of many accommodation entry providers and their statements were recorded in which they have admitted their role in the scam. The beneficiaries of more than Rs. 38,000 crores have been identified and segregated, totally 60,000 Pan Nos. of the beneficiaries have been identified which is in the process of being reported to the assessment wings through the DGITs. Further the report states that in numbers more than 5000 paper/shell companies are involved in providing bogus accommodation of various kinds. Statements from most of the Directors of the Companies have been recorded and were appended to the Report. The report also states that the massive cash trail of Rs. 1,570 crores has been traced from the point it is being deposited to an undisclosed proprietorship bank accounts to the accounts of share brokers. This led to recording statements from the share brokers who have accepted that the said cash has been used for providing accommodation entries of bogus LTCG. The report further states that it is not full and final as they intend to update the data base on regular basis with new actions against entry operators. In Chapter 2 of the report, a detailed comment on the modus operandi has been set out. In Chapter 3, there is a brief discussion on all listed penny stocks scripts used in bogus LTCG scam. Chapter 4 furnishes the details of share brokers involved in the syndicate and their modus operandi. Chapter 5 furnishes the details of entry operators involved in the syndicate and their modus operandi. Chapter 6 furnishes the details ITAT NO. 06 OF 2022 AND ETC. BATCH of the penny stock companies/bogus clients used for purchasing shares of listed penny stocks for providing LTCG to beneficiaries. Chapter 7 sets out a sample cash trail of Rs. 1,500 crores and Chapter 8 deals with the action initiated by the Securities and Stock Exchange Board of India (SEBI) and the beneficiaries who are covered under the search and survey operations.

4. The report dated 27.04.2015 appears to have triggered action throughout the country and the appellant would state that the Directorate of Investigation vide a letter dated 03.07.2015 reported that prices of shares of penny stocks were artificially rigged to benefit of assessees through bogus claims of LTCG. It is further stated that the report submitted by the Directorate of Investigation mentions about the prices of shares of various companies which includes Surabhi Chemicals and the prices were artificially rigged to provide bogus LTCG. It is submitted that the trade pattern of the shares follows a “bell” shape, the company which has hardly any business activity, splitting of shares takes place after which price of the shares on the exchange goes down automatically in proportion with the ratio of split and one does not see anything adverse happening in the scripts. Further the shares of the company were very thinly traded and gradually the value is jacked up to a desired level in a period of about one year so as to provide desired amount to selected beneficiaries. The companies which are involved has neither made any announcement nor does it have any history of dividend rights from financial year 2009-2010 up to 2013-2014 and it is rather peculiar to note that from December, 2011 to August 2013, the share market were almost flat and even the investments in peers have not resulted into any ITAT NO. 06 OF 2022 AND ETC. BATCH gain but the shares of Surabhi Chemicals had risen to such a level without any fundamentals which is beyond anyone’s imagination.

5. In the background of all these investigations, the case of the assessee was discussed by the assessing officer pursuant to the show cause notice dated 29.11.2016. The assessee sent reply through her advocate stating that she fails to understand the nature of investigation carried out by DIT against Surabhi Chemicals and the nature of specific information which is received so as to contemplate a genuine transaction as a sham transaction. The assessee further stated that there is no mention of any specific information against or the company and the letter is general in nature. Therefore, the assessee requested to give specific details of manipulations or connivance carried out by either of the concerned persons directly related to the equity shares of the company in which the assessee had traded. Thus, the assessee’s case was, based on suspicion the transaction cannot be termed as in-genuine. The assessee further stated LTCG arising from transfer of penny stocks cannot be treated as bogus merely because SEBI has initiated an enquiry with regard to the company as well as the brokers as the shares have been purchased by her from the stock exchange and payment was made by cheque and delivery of shares have also been taken. Further it was stated that merely because a small amount was invested in penny stocks and it gave rise to huge capital gains in a short period does not mean that the transaction is bogus. Further it was stated that the assessee’s share broker is M/s Horizon Financial Consultant Private Limited who are a very reputed equity brokerage house and by making a general allegation the transaction done by the assessee cannot be termed to be a sham transaction. Further the assessee stated that in case ITAT NO. 06 OF 2022 AND ETC. BATCH there was any specific incident of any admission by any such person which points out to the assessee, request was made to produce the said person for cross examination. The assessee has also placed reliance on the annual report of Surabhi Chemicals to justify her stand that the company was very much in business in the year of purchase, in the year of sale and also in the succeeding years. Further it was stated that the company has earned a profit before tax of Rs. 117.06 lakhs and paid tax of Rs. 34.24 lakhs in the year 2012-2013 when the assessee purchased the shares and in the year of sale the company reported profit before tax of Rs. 118.47 lakhs and paid tax of Rs. 38.44 lakhs. Therefore, it was submitted that the company has sufficient business and financial assets and the allegations made by the department is unfounded. Further it was stated that the assessee is a regular investor in mutual funds and equity shares of various quoted companies listed on BSE and NSE and she has been earning capital gains both short term and long term and they have been accordingly taxed as per provisions of the Act. Further the assessee stated that she fails to understand as to on what basis the department has classified the share as a penny stock though the assessee received bonus from the said company, dividend from the said company and prominent share analyst and research company M/s. Abrams Consultancy Services Private Limited made a “buy” call on shares of the said company and since the assessee is a regular investor in equity shares she made investment in the shares of the company based on the reports. The assessee stated that she bought 500 equity shares of Surabhi Chemicals which was quoted on the BSE on 16.03.2012 at Rs. 200/- per equity share and such cost price came to Rs. 1,00,000/- and the payment was made through account payee cheque.
ITAT NO. 06 OF 2022 AND ETC. BATCH The assessee to show that she is a regular trader and investor in equity share for several years, produced the details of the investment made by her. Further, it was stated that the 500 equity shares were transferred in the name of the assessee on 18.07.2012 and were sent for D-Mat on 14.12.2012 and dematerialised on 29.12.2012. The assessee is stated to have allotted bonus share from the company on 14.08.2012 in the ratio of 9 shares for every 1 share held and since she had purchased 500 equity shares she received 4500 further equity shares as bonus which were also transferred to D-Mat account. Further it was stated that the equity shares of the company were sub-divided i.e for every one share having nominal value of Rs. 10, the equity holders got 10 shares of Rs. 1 and the assessee got 45,000 equity shares thus, totally holding 50,000 equity shares in the said company. The assessee placed reliance on the various decisions of the tribunal as well as the High Courts for the proposition that when purchase of shares was found to be genuine and were sold through proper banking channel no adverse inference can be drawn against the assessee and the addition made under Section 68 of the Act was to be deleted. With the above submissions, the assessee stated that since there is no specific or material findings against her so as to alleged the gain as an unexplained cash credit and that the assessee has fully and truly disclosed all facts with all supporting evidence and the entire transaction having been done through proper banking channel and supported by proper bills and contract notes, it stand fully explained and the entire transaction is verifiable with agencies to prove that assessee has transacted and therefore the question of invoking Section 68 of the Act does not arise.

ITAT NO. 06 OF 2022 AND ETC. BATCH

6. The assessing officer after taking into consideration the submissions made by the assessee and the documents produced by the assessee noted that from the contract notes, it was seen that the assessee purchased 50,000 shares in Surabhi Chemicals of Rs. 1,00,000/- on 16.03.2012 and 14.08.2012 and just after completion of one year and few months, when the investment in shares become eligible for LTCG, it was sold for Rs. 29,23,500/- and total LTCG was computed for Rs. 28,23,500/- and in that process, the assessee has managed an increase of almost 2823 % in a short span of 17 to 21 months. The assessing officer then referred to the communication received from the Directorate of Investigation and took note of the fact that in the list of companies which have been mentioned in the report of the Directorate of Investigation includes M/s. Surabhi Chemicals and it has been ascertained that the share prices have been artificially rigged to provide bogus LTCG. The assessing officer also noted the trade pattern of the shares which followed a “bell” shape. After noting the above, the assessing officer points out that the facts and circumstances leading to the transactions done by the assessee seen in a larger frame reveals accommodation entry scam as reported by the Directorate of Investigation more particularly when the investment by the assessee was in a company having no financial worth and such investment does not confirm to normal behaviour of an investor. The assessing officer relied on the decision of the Hon’ble Supreme Court in CIT Versus Durga Prasad More 1 wherein the Hon’ble Supreme Court pointed out that the taxing authorities are entitled to look into the surrounding (1971) 82 ITR 540 ITAT NO. 06 OF 2022 AND ETC. BATCH circumstances to find out the reality and the matter has to be considered by applying the test of human probability.

7. For the same proposition, the Assessing Officer also referred to the decision of the Hon’ble Supreme Court in Sumati Dayal Versus CIT 2. Taking note of the said legal principle, the Assessing Officer points out that considering the surrounding circumstances and applying the test of human probabilities coupled with the report of the Directorate of Investigation which was discussed in the assessment order, it was held that the assessee had been a party to a pre-designed mode of transaction and invested in the shares of M/s. Surabhi Chemicals to convert unaccounted cash under the guise of LTCG amounting to Rs. 28,23,500/- and therefore, the said amount is considered as income from undisclosed sources denying the claim of exemption as LTCG. Further, the assessing Officer stated that the share brokers/ entry operators charged Rs. 10/- to Rs. 540/- per Rs. 100/- of cheque amount and calculated the unexplained expenditure trade commission charged by the operators and worked out the sum of Rs. 14,118/- and the total addition was computed at Rs. 28,37,618/-. The assessee was informed that penalty proceedings under Section 271(1)(c) of the Act is to be initiated separately. With the above finding, the assessment was completed by Order dated 22.12.2016.

8. The assessee preferred appeal before the CIT(A) reiterating the stand taken before the Assessing Officer. Before the CIT(A) it was contended that the Assessing Officer never pointed out any discrepancy in any of the documents submitted and nothing adverse was mentioned about the (1995) 214 ITR 801 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH assessee. Further, it was contended that the assessee has discharged the burden of proving the genuinity of the transaction and the burden of proving the contrary stand shifted to the department which has completely failed to discharge such burden and the assessment having been based on suspicion and surmises is illegal. Further in spite of the assessee having demanded for copy of any specific information pertaining to the assessee covered in the report of the Directorate of Investigation and to make available the share broker/ Director of the company for cross-examination, the Assessing Officer did not reply to such request made by the assessee which goes to show that there is no specific information or material adverse to the assessee. It was submitted that the assessee having proved the identity, genuineness of the transaction cannot be denied the claim for the LTCG. The assessee relied on various decisions of the Tribunals and the High Courts most of which were also placed before the Assessing Officer.

9. The CIT(A) after considering the entire facts and the papers and documents produced by the assessee holds that they are merely papers and documents and not evidence of genuine transaction and the whole gamut of the transactions are unnatural and suspicious transaction and therefore, the rules of suspicious transaction shall apply in the assessee’s case. Further, the CIT(A) holds that there is grave doubt on the story proposed by the assessee before the Assessing Officer are enough to justify the humongous accruing to the assessee by way of capital gains. Further, with regard to the bank documents, the CIT(A) states that they are mere self-certifying recitals and cannot save the assessee. To support of such contention, reliance was ITAT NO. 06 OF 2022 AND ETC. BATCH placed on the decision of Hon’ble Supreme Court in P. Mohanakala3 as well as the decision in Durga Prasad More and Sumati Dayal. The CIT(A) referred to the decision of the High Court of Delhi in Sajan Dass & Sons Versus CIT 4, wherein it was held that a mere identification of the donor and showing the memo of the gift amount through bank channel was not sufficient to prove the genuineness of the gift and the claim of gift having been made by the assessee the onus is placed on the assessee to establish the identity of the persons making the gift and also his capacity to make a gift and that it has actually be received as gift from the donor. The CIT(A) referred to a decision of the Bombay Bench of the ITAT in the case of M/s. Mont Blane Properties and Industries Pvt. Ltd., ITA No. 614/Bom/87 A.Y. 1983-84 wherein the Tribunal held that the word “evidence” as used under Section 143(3) covered circumstantial evidence also and cannot be confined to direct evidence and in tax jurisprudence the word “evidence” had much wider connotations. Further, the use of the word “material” in Section 143(3) showed that the Assessing Officer not being a Court could rely upon material which might not strictly be evidence admissible under the Indian Evidence Act, for the purpose of making an order of assessment. Further, the CIT(A) held that the payment through bank, performance through the stock exchange and other features are apparent features and the real features are the manipulated and abnormal price of offload and a sudden peak thereafter and therefore, the CIT(A) concludes that the transactions fall in the realm of suspicious and dubious transactions. The CIT(A) referred to the decision of 291 ITR278 (SC) 264 ITR 435 (Del.) ITAT NO. 06 OF 2022 AND ETC. BATCH the High Court of Bombay in Sanjay Bimalchand Jain Versus Pr.CIT dated 10th April, 2017 upholding the order of Nagpur Bench of the Tribunal holding that on the facts emergent in the case and the preponderance of probabilities, the entire capital gains claim were to be treated as fictitious and bogus. Finally, the CIT(A) concludes by observing that the fantastic sale price was not at all possible as there was no economic or financial basis to justify the price-rise, the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the guise of LTCG. With the above finding, the appeal filed by the assessee was dismissed.

10. The assessee preferred appeal before the learned Tribunal. The learned Tribunal commences its order stating that the sole and identical issue raised in the batch of appeals (90), is the genuineness of the assessee’s claim of LTCG/LTCI of the capital loss derived from sale of shares and since the issues are identical, the case pertaining to the assessee Swati Bajaj is taken as the lead case. In Paragraph 3 of the impugned order, the learned Tribunal extracts the order passed by the CIT(A) in its entirety, after which in paragraph 4 the Tribunal holds that there is no merit in the argument of the revenue as the assessee has placed on record the relevant contract notes proper documentary evidence undertaking purchase/ sale of the shares through registered brokers by banking channels, D-Mat statement etc. and there is nothing to pinpoint anything against the assessees. The learned Tribunal referred to decision of the Coordinate Bench in Mahavir Jhanwar, Kolkata Versus I.T.O., ITA N0. 2474/Kol/2018 dated 01.02.2019, where the Tribunal allowed the assessee’s appeal on the ground that decision in all cases should be based on evidence and not on generalization, human ITAT NO. 06 OF 2022 AND ETC. BATCH probabilities, suspicion, conjectures and surmises. Reference was made to the decision of this Court in CIT Versus Carbo Industrial Holdings Ltd.5, CIT Versus Emerald Commercial Ltd. 6 and the decision of the High Court of Bombay in CIT Versus Shri Mukesh Ratilal Marolia7. Ultimately, the learned Tribunal concludes by stating that it adopts the reasoning given by the Coordinate Bench of the Tribunal and allows the appeal in the lead case namely, that of the assessee Mrs. Swati Bajaj. With regard to remaining 89 appeals the learned Tribunal states that the same order will apply to the remaining 89 appeals in the absence of any distinction pointed out by the revenue. Aggrieved by such order, the revenue has preferred this appeal before this Court.

11. Mr. Aryak Dutta, learned Senior Standing Counsel appearing for the revenue in the lead case submitted that the learned Tribunal ignored the direct and circumstantial evidence brought on record by the Assessing Officer to establish that the share price of Surabhi Chemicals have been manipulated leading to fictitious LTCG of Rs. 28,23,500/- which the assessee has claimed to be exempt from taxation. It is submitted that the order passed by the learned Tribunal suffers from perversity as it ignored the facts brought on record establishing manipulation of share prices of Surabhi Chemicals as part of device to generate fictitious LTCG. Further, the learned Tribunal overlooked the fact that the entire transaction was stage-managed with the object to facilitate the assessee to plough back its unaccounted income in the form of fictitious LTCG. The learned Standing Counsel has referred to the 214 ITR 244 Calcutta High Court (2001) 250 ITR 539 ITA No. 456 of 2007 Bombay High Court ITAT NO. 06 OF 2022 AND ETC. BATCH findings recorded by the Assessing Officer, CIT(A) and pointed out that the learned Tribunal without even noting the intricate factual details allowed the appeal filed by the assessee. The learned Tribunal has not rendered any finding on the modus operandi adopted in the entire transaction. It is further submitted that the learned Tribunal ought to have seen that the investigation is directed against penny stock companies and it has been established that the share prices were rigging and therefore, the question of conduct of investigation on the assessee is not necessary. More particularly, owing to the admitted fact Surabhi Chemicals is a penny stock company. Learned Standing counsel has referred to the relevant portions of the investigation report submitted by the DIT. In support of his contention the learned Senior Standing Counsel referred to decisions in Durga Prasad More and Sumati Dayal rendered by the Hon’ble Supreme Court, where under it was held that the Court and the Tribunals have to judge the evidence before it by applying the test of human probabilities, the surrounding circumstances which exercise had been done by the Assessing Officer and affirmed by the CIT(A). Reliance was placed on the decision of the High Court of Madras in CIT Versus Manish D. Jain 8and it is submitted that in the said decision all the decisions rendered have been referred to and the modus operandi which has been adopted was also examined and the appeal filed by the revenue was allowed, and the decision was followed in PCIT Versus Prabha Jain 9. Reliance was placed on the decision in Tharakumari Versus ITO 10 in which case the Court noting the nature of transaction of Shell Company as sham, (2020) SCC Online Mad 5876 (2021) 439 ITR 304 (Mad.)(HC) (2019) SCC Online Mad 9523 ITAT NO. 06 OF 2022 AND ETC. BATCH dismissed the appeal filed by the assessee. Reference was made in the decision of the Tribunal in Abhinav Agarwal Versus DCIT, Meerut 11 wherein the facts were considered by the Tribunal and the transaction done by the assessee therein was held to be not genuine. Reliance was placed on the decision in CIT Versus N.R. Portfolio Pvt. Ltd.12 which decision was approved by the Hon’ble Supreme Court as reported in (2019) 15 SCC 529. This decision is pressed into service to explain as to the manner and mode of conducting assessment proceedings, the application of the principle of preponderance of probabilities as to how the entire material would be germane for completing the assessment and that certificate of incorporation of a company, payment by banking channels etc. cannot in all cases tantamount to satisfactory discharge of the onus on the assessee to prove the genuineness of the transaction. To explain as to how the expression “when the assessee offers no explanation” occurring in Section 68 has to be interpreted, reliance was placed on the decision in CIT Versus P. Mohanakala13 With regard to the burden of proof/ onus of proof reliance was placed and decision of the Hon’ble Supreme Court in Roshan Di Hatti Versus CIT 14. For the same proposition reliance was placed on the decision of the Hon’ble Supreme Court in Kale Khan Mohammad Hanif Versus Commissioner of Income Tax15. Reliance was placed on the decision of the High Court at Bombay in Sanjay Bimalchand Jain L/H/Shantidevi Bimalchand Jain Versus the Principal Commissioner of Income Tax, 2022 SCC Online ITAT 28 (2012) SCC Online (Del.) 6466 2007 6 SCC 21 1977 2 SCC 378 1963 50 ITR 1 SC ITAT NO. 06 OF 2022 AND ETC. BATCH Nagpur & Anr., Income Tax Appeal No. 18 of 2017 dated 10.4.2017 wherein the Court upheld the order passed by the learned Tribunal which had held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth Rs. 5 of a little known company would jump from Rs. 5 to Rs. 485. The learned Senior Standing Counsel distinguished the decision in Carbo Industrial Holdings, Mahavir Jhanwar and Emerald Commercial Ltd. which were referred to by the Tribunal on the ground the facts and circumstances were entirely different.

12. Mr. Vipul Kundalia, learned Senior Standing Counsel appearing for the revenue in the other appeals referred to the decision in Principle Commissioner of Income Tax, Delhi Versus NDR Promoters Pvt. Ltd. 16 wherein the Court relies on the decision of the Tribunal after noting that the transactions done by the assessee was clearly sham and make believe and the excellent paper work to camouflage the bogus nature. It is submitted by Mr. Vipul Kundalia that the Court has to consider the totality of the circumstances as to how the action was initiated to prevent black-money being converted and the seed was sown by constituting a special investigating team pursuant to the directions of the Hon’ble Supreme Court in Ram Jethmalani & Ors. Versus Union of India & Ors. 17 The learned Standing Counsel has elaborately referred to the various paragraphs of the decision to explain as to how the modus operandi adopted in these cases are very complex and pursuant to the directions issued by the Hon’ble Supreme Court special investigating team was constituted and this exercise was done 2019 SCC Online (Del.) 6599 (2011) 8 SCC 1 ITAT NO. 06 OF 2022 AND ETC. BATCH by various departments and the present investigation done by the Income Tax department is a follow up of the investigation which had commenced in the country since 2011. Therefore, it is submitted that the Assessing Officer and the CIT(A) rightly construed the surrounding circumstances and denied the claim of LTCG as being bogus. The learned standing Counsel has taken us through relevant portions of the investigation report to explain the machinery which was adopted, how the beneficiaries were identified as to how companies like Surabhi Chemicals have been found to be penny stock companies and their names find place in the investigation report. Specific reference was made to the pictorial representation to explain the nature of transaction as to be “bell” shaped and how the share prices steeply fall after the expiry of the eligibility period for claiming LTCG. Therefore, it is submitted that the profit earned is clearly due to manipulation done in the stock market and the onus is on the assessees to prove the transactions to be genuine which has not been discharged by them and the Tribunal erroneously reversed the order passed by the Assessing Officer as confirmed by the CIT(A). Reliance was placed on the decision in Sanjay Kaul Versus Principal Commissioner of Income Tax, Delhi-818 wherein an identical test was considered, a view taken by the Assessing Officer while referring to the surrounding circumstances, the human conduct and preponderance probabilities and lack of financial logic coupled with the modus operandi was approved by the Court by dismissing the appeal filed by the assessee. In the said decision, the decision of the Hon’ble Supreme Court in Suman MANU/DE/1506/2020 ITAT NO. 06 OF 2022 AND ETC. BATCH Poddar Versus ITO19 has been extensively relied upon. Reliance was placed on the decision in the Udit Kalra Versus ITO 20 where the Court affirmed the order passed by the learned Tribunal which rejected the case of the assessee in more or less similar factual circumstances after noting the decision of the Hon’ble Supreme Court in McDowell and Co. Ltd. Versus CTO 21 wherein it was held that the tax planning should be legitimate, provided, it is within the framework of law and any colourable device cannot be part of tax planning and it is linked to encourage or entertain the people that it is honourable to avoid the payment of tax by dubious methods.

13. Mr. Samarjit Roy Chowdhury, learned Senior Standing Counsel appearing for the Revenue in other appeals referred to an office memorandum issued by the Central Board dated 16th September, 2009 by which exemption was withdrawn in respect of appeals to be filed in penny stock cases, regardless of the monetary limit fixed in the earlier circular. It is submitted that this office memorandum carves out an exception from the applicability of the circular issued by the Board fixing monetary limits for filing appeals before the Courts. The learned Standing Counsel explained as to what is “penny stock” in the American concept and submitted that when the share price is less than one dollar it is referred to as a penny stock. So far as the Indian concept, “penny stocks” are shares which are traded at very low prices such as less than Rs. 100 per share. The learned Standing Counsel has drawn our attention to the assessment order passed in the case of the assessee, Dinesh Kumar Banshal which is the subject matter of ITAT (2019) 112 Taxmann.com 330 (SC) MANU/DE/1507/2019 (1985) 154 ITR 148 ITAT NO. 06 OF 2022 AND ETC. BATCH No. 31 of 2020 and submitted that it is one of the well-drafted assessment orders dealing with all issues elaborately. The learned Standing Counsel has drawn our attention to the relevant paragraphs in the assessment order to emphasize this submission that the Assessing Officer has clearly brought out the machinations of fraudulent, manipulative and deceptive dealings by misusing the stock exchange system to generate bogus LTCG. It is pointed out that the stock brokers as well as the Director of M/s. Kailash Auto Finance Limited were examined on oath and they have accepted that rigging of prices of the shares have been done. Further, our attention has been drawn to the report of the special investigating team which has been extensively referred by the Assessing Officer. Further, the Assessing Officer has listed out the companies in which the stock brokers have made manipulative and deceptive dealings and Kailash Auto Finance Limited is one such company. The Assessing Officer has also elaborately discussed the various decisions and ultimately, completed the assessment and denied the claim for LTCG. The said order was affirmed by the CIT(A). However, the Tribunal by a common order in 9 appeals, allowed the appeals following the decision in Mahavir Jhanwar, the correctness of which decision has been canvassed in the other appeals before this Court. It is further submitted that none of the findings recorded by the Assessing Officer or the CIT(A) had been controverted by the learned Tribunal. In support of this contention, the learned Standing Counsel referred to the decision of the High Court of Delhi in CIT Versus Nipun Buliders & Developers Pvt. Ltd.22 dated 07.01.2013. This decision was pressed into service to explain the concept of burden of ITA NO. 120 of 2012 ITAT NO. 06 OF 2022 AND ETC. BATCH proof and upon whom the burden lay qua Section 68 of the Act. In the cases on hand, the assessee has not discharged the burden which has been cast upon them which was rightly noted by the Assessing Officer as well as the CIT(A) but erroneously reversed by the Tribunal. Reliance was placed on the decision of the Hon’ble Supreme Court in CIT, Bihar Versus S.P. Jain 23 for the proposition that if no cogent reasons has been given by the Tribunal, for rejecting the findings of the Assessing Officer and if the Tribunal failed to take into account the relevant materials on record and has based its findings on mere conjecture and surmises, the order of the Tribunal has to be interfered.

14. Mr. Soumen Bhattacharya, learned Junior Standing Counsel appearing for the Revenue referred to the budget speech of the Hon’ble Minister of Finance on February 1, 2018 wherein it was pointed out that the total amount of exempted capital gains from listed share and units is around Rs. 3,67,000 crores as per the returns filed for the assessment year 2017-18 and major part of this gain has accrued to corporates and LLPs and this has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. Further, the return on investment in equity is already called attractive even without exemption and there is therefore a strong case for bringing long terms capital gains from listed equities in the tax net. Reference was made to the speech of the Hon’ble Minister of Finance during the Budget 2022-23 wherein the Hon’ble Minister had referred to “Mahabharat” and the duty of the tax payer for voluntary compliance of the tax liability. Reliance was placed on the decision AIR 1973 SC 977 ITAT NO. 06 OF 2022 AND ETC. BATCH of the Hon’ble Supreme Court in McDowell and Co. Ltd. Versus CTO 24 wherein the Hon’ble Supreme Court held that tax planning may be legitimate provided its within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage and entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods and it is the obligation of every citizen to pay the tax honestly without resorting to subterfuges. Commenting upon the order passed by the Tribunal, it is submitted that the order of the Tribunal directly and substantially interferes with the interest of the revenue and the findings are not based on the evidence brought on record by the Assessing Officer, the order suffers from material irregularities without independent reasons and the Tribunal has glossed over the relevant facts and therefore, the order of the Tribunal suffers from perversity. In support of such contention, reliance was placed on the decision of the High Court at Madras in PCIT Versus Rakesh Sarin 25.

15. Mr. Om Narayan Rai, Learned Senior Standing Counsel appearing for the other appellant submitted that the case of the assessee from the inception is that the revenue has acted on generalized report of the investigation done by the department and there is nothing specific relatable to the assessee. Secondly, it was contended that copy of such investigation report was not furnished to the assessee. Learned Counsel submitted that circumstantial evidence can be the sole basis for taking the decision in the matter. In this regard, reliance was placed on the decision of the Hon’ble AIR 1986 SC 649 TCA NO. 1060 of 2019 ITAT NO. 06 OF 2022 AND ETC. BATCH Supreme Court in SEBI Versus Kishore R. Ajmera 26wherein the Court has pointed out as to the important aspect with regard to the proximity of time between the buy and sell orders, prior meeting of minds, unnatural rise in the prices of the scripts and how the conclusion can be gathered from the various circumstances coupled with preponderance of probabilities. Therefore, it is submitted that absence of direct evidence is immaterial. Reliance was placed on the decision of the Hon’ble Supreme Court in Commissioner of Customs Versus Dilip Kumar and Company 27 for the proposition that exemption notification should be interpreted strictly, as the burden of proof, admittedly would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. It is submitted that Section 10 (38) of the Income Tax Act is a provision where exemption is being claimed by the assessee and the burden is on the assessee to prove that he is entitled to the claim for exemption which the assessees before this Court have failed to establish. With regard to the arguments of the assessee that the investigation report is general and not assessee specific, it is submitted that the assessee has not pleaded any prejudice on account of non-supply of the investigation report. Therefore mere non-furnishing of the report will not vitiate the proceedings. Without noting these legal principles, the Learned Tribunal had posed a wrong question to itself which has resulted in a wrong answer. The correct question that the learned Tribunal should have asked itself is whether the assessee was prejudiced on account of non-supply of the investigation (2016) 6 SCC 368 (2018) 9 SCC 1 ITAT NO. 06 OF 2022 AND ETC. BATCH report. To explain the test of prejudice or the test of fair hearing. Reliance was placed on the decision of the Hon’ble Supreme Court in SBI Versus S K Sharma 28. Reliance was also placed on the decision of the Hon’ble Supreme Court in SBI Versus M.J. James for the same proposition that prejudice should exist as a matter of fact or to be based upon the definite inference of likelihood of prejudice flowing through non-observance of natural justice. It is submitted that none of the assessees have pleaded any prejudice caused to them and merely by stating that the report has not furnished to them nor the Director of the company was not been made available for cross examination would not suffice. Reliance was placed on the decision of the Hon’ble Division Bench of this Court in Kishanlal Agarwalla Versus Collector of Land Customs 29. This decision was pressed into service that as long as the party charged has a fair and reasonable opportunity to see, comment and criticize the evidence, statement or record on which the charge is being made against him, the demands and the test of natural justice are satisfied and cross examination in that sense is not a technical cross examination in a Court of Law. For the same proposition reliance was placed on the decision of the Hon’ble Supreme Court in State of J&K Versus Bakshi Ghulam Mohammad & Another 30 wherein it was held that a right of hearing cannot include a right of cross examination and the right must depend on the circumstance of each case and must also depend on the statute under which the allegations are being enquired into. Thus, by referring to the above decisions, it is (1996) 3 SCC 364 AIR 1967 Cal 80 AIR 1967 SC 122 ITAT NO. 06 OF 2022 AND ETC. BATCH submitted when the statements recorded during the investigation were not against the assessee, they are not entitled to claim any right of cross examination. The next submission of Mr. Rai is on the powers of the Appellate Tribunal under Section 254 of the Act. It is submitted that the nature of the powers were interpreted by the Hon’ble Supreme Court in Hukum Chand Mills Limited Versus CIT 31 wherein the Court held that the tribunal had jurisdiction to frame the question raised for the first time. It is submitted that on a reading of Section 254 (1) and Section 255 (6) of the Act clearly shows the power exercisable by the Tribunal and they are akin and equal to that of the power exercisable by the assessing authority and in the case on hand the tribunal ought to have exercised such power and or its failure renders the order as perverse. For the same proposition, reliance was placed on the decision of the High Court of Bombay in New India Assurance Limited Versus CIT 32. It is submitted that the said decision was approved by the Hon’ble Supreme Court in Ajay Gandhi and Another Versus B. Singh and Others 33 wherein it was pointed out that the Income Tax Appellate Tribunal exercised judicial function and has trappings of a Court and that it is the ultimate fact finding authority under the Act. The Learned Standing Counsel referred to Section 107 and Order 41 CPC to explain the powers to the Appellate Court and as to how this Court can exercise the jurisdiction in the matter. The Learned Counsel referred to Section 260 A (7) of the Act as also Section 103 and Order 41 Rule 33 CPC to explain the powers of this Court. Further to explain the powers of the AIR 1967 (SC) 455 AIR 1958 Bombay 143 (2004) 2 SCC 120 ITAT NO. 06 OF 2022 AND ETC. BATCH Court, reliance was placed on the decision of the Hon’ble Division Bench of this Court in C.C.A.P. Limited Versus Commissioner of Income Tax 34. The next submission was on the effect of Section 10 (38) of the Act. Reference was made to Section 2 (13) of the Act which defines the term “business”. Elaborate reference was made to the decision of the Hon’ble Supreme Court in G. Venkataswami Naidu and Company Versus CIT 35 to explain as to how the adventure is in the nature of trade. It is submitted that the Hon’ble Supreme Court has laid down the test to be applied for determining the character of the transaction in paragraph 17 of the judgment and if the test are applied to the facts of the instant case, it will clearly reveal the intention behind the purchase of shared by the assessees.

16. The learned Senior Standing Counsel reiterated the findings in the report of the Special Investigation Team constituted pursuant to the orders passed by the Hon’ble Supreme Court and referred to the recommendations of the Special Investigation Team with specific reference to misuse of exemption on LTCG for money laundering. It was pointed out that a company with poor financial fundamentals in terms of past income or turn- over is able to raise huge capital allotment of preferential allotment of shares is made to various entities, there is sharp rise in price of script once the preferential allotment is done and this is clearly achieved through circular trading of shares among a selected group of companies. These scripts of the companies often have own promoters/brokers. The scripts with thus artificially inflated price are offloaded through companies whose funding is (2004) 270 ITR 248 AIR 1959 SC 359 ITAT NO. 06 OF 2022 AND ETC. BATCH proved by the same set of people who want to convert black-money into white. Therefore, it was stated that there is an urgent need for an effective, preventive and punitive action in such matters to prevent recurrence of such instances. Several recommendations were made by the SIT after noting the relevant facts. It is submitted that in terms of Section 114 of the Evidence Act, the Court may presume existence of certain facts and if read along with Section 4 of the Evidence Act which explains the words “may presume”, and the facts of the cases on hand being examined will clearly show the circumstances under which the Assessing Officers have acted and the facts were considered and also the normal human conduct of an investor, preponderance of probabilities and the surrounding circumstances and finding has been rendered. It is reiterated that the Tribunal clearly abdicated its powers, did not examine any of the facts which it is required to do in terms of the power conferred on the Tribunal under the Act. With the above submission, the learned Standing Counsel prayed for allowing the appeals.

17. Mr. Tilak Mitra, learned Senior Standing Counsel for the appellant while adopting the submissions made by the other learned Standing Counsels, referred to an assessment order dated 18.11.2016 in the case of the assessee, Sanjay Kumar Ostwal (HUF) for the assessment year 2013-14 and invited our attention to the observations made by the Assessing Officer to demonstrate the modus operandi adopted in the matters and as to how M/s. S.R.K. Industries was a penny stock company and how the share prices were rigged and the assessee who had invested a sum of Rs. 1,00,000/- for purchase of 10,000 shares in SRK Industries was able to sell those shares after 14 months for a total consideration of Rs. 75,61,372/-
ITAT NO. 06 OF 2022 AND ETC. BATCH thereby earning total LTCG of Rs. 74,68,959/-. Therefore, it is submitted that the Tribunal brushed aside these important facts and erroneously reversed the orders passed by the CIT. Further it is submitted that SRK Industries is one of the 84 companies which have been listed as penny stock companies in the investigation report.

18. Mr. Prithu Dhudhoria, learned Junior Standing Counsel appearing in the some of the appeals submitted that in one of the appeals in ITA no. 156 of 2021, (assessee, Girish Tikmani), the Assessing Officer without discussing the facts by a cryptic order accepted the claim of the assessee towards LTCG in respect of shares purchased and sold by the assessee of a shell company. The Commissioner of Income Tax (CIT), exercised power under Section 263 of the Act and reversed the order passed by the Assessing Officer. The learned Standing Counsel has elaborately referred to the findings recorded by the CIT and submitted that the assessee did not furnish any details which has been clearly noted by the Commissioner who on facts found the assessment order to be erroneous and prejudicial to the interest of the revenue. It is submitted that power under Section 263 of the Act could be exercised by the Commissioner and one of the circumstances which would justify invoking such a power is where the Assessing Officer has failed to conduct any enquiry. The CIT has clearly brought out in his order that no enquiry was conducted by the Assessing officer and mechanically the return filed by the assessee was accepted. Reliance was placed on the order passed by the Hon’ble Supreme Court in Deniel Merchants Pvt. Ltd. Versus ITO in Special Leave Appeal No. 23976 of 2017 dated 29.11.2017 wherein the Hon’ble Supreme Court dismissed a batch of appeals arising out of orders ITAT NO. 06 OF 2022 AND ETC. BATCH passed by the CIT under Section 263 of the Act. The Hon’ble Supreme Court held that the CIT has observed that the Assessing Officer did not make any proper enquiry while making the assessment and accepting the explanation of the assessee insofar as receipt of share application money is concerned and on that basis the CIT had, after setting aside the order of the Assessing Officer, directed the Assessing Officer to carry a thorough and detailed enquiry and this order which had been upheld by the High Court was not interfered. With the above submissions, the learned Standing Counsel adopted the argument made by the other Standing Counsels.

19. Mr. Subhash Agarwal, Learned Advocate leading the arguments on behalf of the assessees, submitted by the department and that the copy of the investigation report was not furnished to the assessee and the stand taken by the revenue that the report is not required to be furnished is not tenable. The learned Advocate referred to the decision of the Hon’ble Supreme Court in T. Takano Versus SEBI in Civil Appeal No. 487-488 of 2022, dated February 18, 2022 and submitted that the revenue has no right to withhold the investigation report which appears to be the basis of the entire controversy. It is submitted that if the order of the tribunal, in the opinion of this Court has not properly discussed the facts of the case then the matter requires to be remanded to the tribunal for re-consideration. The Learned Advocate has drawn our attention to the investigation report and submitted that the report identifies the list of penny stocks and neither the name of the assessee, Smt. Swati Bajaj, nor the name of the stock broker of the assessee has been mentioned therein. To explain the concept of risk- reward ratio, the learned advocate referred to various articles which have ITAT NO. 06 OF 2022 AND ETC. BATCH been published to demonstrate that there is nothing tainted to invest in a penny stock company and it is an accepted practice in the stock market to trade in such stocks. In this regard the learned advocate referred to an article which has been published in the internet advising the investors as to how to buy unlisted shares. Reference was also made to a news item in the Economic Times dated 27.04.2022 titled “one multidagger stock a day! Tax’s the average of what D-street caught in the last two years”. Nextly, the learned advocate referred to the final order passed by SEBI dated 21.09.2017 by which 244 entities which were treated as penny stocks have been exonerated and one such entity is M/s. Kailash Auto in which the assessee had invested. It is submitted that the revenue has taken strong exception to the off-market transaction which is approved manner of transaction and to explain the methodology of off-market transaction, reference was made to the news item in the Economic Times. Further referring to other articles which have been published in the internet, it is submitted that efficacy of both technical and fundamental analysis is disputed by the efficient- market hypothesis, which states that stocks market prices are essentially unpredictable and research on whether technical analysis offer any benefit has produced mixed result. The learned advocate also referred to a list of top investors in India and submitted that all of them hail from a particular state in the country whose business acumen and the courage to take risk has been well recognized. To explain the concept of fluctuation in the market price, the learned advocate referred to a tabular column culled out from a magazine, “Capital Market” issue of April-May, 2022. It is submitted that the percentage of fluctuation is calculated with the formula, viz, price divided by ITAT NO. 06 OF 2022 AND ETC. BATCH earnings per share and referring to the figures therein, by way of illustration, it is explained that the percentage of fluctuations between 200 to 600 is realistic.

20. It is submitted that the four basic principles of law as has been consistently adopted by courts are:

(i) The person who alleges should prove, (ii) All adverse material is required to be supplied to the person against whom the allegations is made, (iii) No findings can be recorded on surmises and conjectures, (iv) Adverse action can be initiated only based on evidence.

It is submitted that these four cardinal principles have been ignored by the department. It is submitted that the assessee Smt. Swati Bajaj had invested in robust companies and there is absolutely no reason to doubt the genuinity of the transaction. Further it is submitted that if the addition made by the respective assessment officers on account of alleged bogus, LTCG/STCG at best it can be, a sum of Rs. 9822 crores and not the astronomical figure, (Rs. 38,000 crores), mentioned by the revenue before this Court. The learned Advocate has referred to the assessment in the case of Smt. Swati Bajaj and submitted that there is no adverse comment or statement against the share brokers of the assessee, M/s. Horizon Financial Consultant Private Limited. The documents which have been furnished by the assessee have been set out by the Assessing Officer in his order dated 22.12.2016 in paragraph 3 and in sub-para (d) of Para 3, the assessing officer has noted the explanation given by the assessee as to how the investment was made and going by the investment made by the assessee, it is seen that only 25 % of the investment made by the assessee was in ITAT NO. 06 OF 2022 AND ETC. BATCH Surabhi Chemicals which is stated to be a penny stock company. Thus, it is submitted that the facts clearly shows that the assessee, Smt. Swati Bajaj is a bona fide investor in stocks and shares. Further it is submitted that the assessing officer himself notes that the sale of the shares done by the assessee was not immediately after the period eligible for LTCG but after 17 to 21 months. Further the assessing officer has referred to investigation report which forms part of the findings recorded by him and therefore the report should have been furnished to the assessee. Commenting upon the reasoning given by the CIT (A) in his order dated 22.11.2018, it is submitted that the First Appellate Authority failed to note that the investment made by the assessee was in a robust company and this fact has not been appreciated by the appellate authority. Further it is submitted that the revenue had raised serious objections with regard to the findings rendered by the tribunal in paragraph 4 of the order dated 26.06.2019 wherein it has been mentioned as STCL instead of LTCG and that being only a typographical error cannot be blown out of proportion. Further the articles appearing in Hindu Business Line were referred to show as to how the SEBI had banned off-market transaction of shares done by brokers through power of attorneys and other than that there is nothing wrong to enter into off- market transaction. To explain the concept of divergence, reference was made to an article published in Investopedia. Similarly, an article published on “Delan” was referred to and it is submitted that stocks that display a usually are blue chip stocks and once that for lower volatility and more predictable behavioural patterns. Investors used in normal probability ITAT NO. 06 OF 2022 AND ETC. BATCH distribution of stocks past returns to make assumptions regarding expected future returns.

21. Mr. Agarwal next referred to compilation of decisions and firstly took us through the decision in Sumati Dayal and referred to the facts as mentioned in paragraphs 8 and 12 of the judgment and submitted that the facts in the said case was entirely different and could not have been applied to the assessees case. Nextly, the learned counsel sought to distinguish the decision in Durga Prasad More and submitted that in the said decision the Hon’ble Supreme Court held that the case of the assessee was based on self- serving documents which is not the case of the assessee Smt. Swati Bajaj. The decision relied on by Mr. Rai Standing Counsel in the case Kishore R. Ajmera was referred to and it was submitted that the matter pertain to stocks brokers and the decision can have no application to the facts of the case of Smt. Swati Bajaj. With regard to the decisions in the case of Manish D. Jain, it is submitted that on facts the Madras High Court recorded that SEBI and the assessing officer found that the assessee Manish D. Jain played a role in inflating price which is not so in the assessees case. Similarly, distinguishing the decision in Pinky Devi, it is submitted that in the said case the assessee failed to discharge the onus cast upon her which is not so in the case of Smt. Swati Bajaj as she had furnished the contract notes and all other documents. To explain the concept of as to how a judgment has to be read, reliance was placed on the decision in CIT Versus Sun Engineering Works Private Limited 36. Reliance was placed on the decision of the Hon’ble Supreme Court in Dhakeswari Cotton Mills (1992) 198 ITR 297 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH Limited Versus CIT 37 for the proposition that assessments cannot be based on surmises and conjectures. The learned advocate referred to the assessment order in the case of the assessee Suman Kumar which is the subject matter of ITAT No. 128 of 2021 and submitted that the assessment order clearly shows that the names of the brokers/sub brokers and nowhere the name of the assessee, Suman Kumar finds place. Reliance was placed on the decision of the Hon’ble Division Bench of this Court in ITA No. 129 of 2012, Classic Growers Limited Versus CIT Kolkata-(III), Kolkata, dated 28.02.2013 wherein the Court allowed the assessees appeal after having found that the assessee neither suppressed any income nor sold any property by undervaluing the same. Reference was made to the decision of the Division Bench of this Court in ITA 22 of 2009 in CIT Versus Bhagwati Prasad Agarwal wherein the Division Bench of this Court confirmed the order of the tribunal which held that the chain of transactions entered into by the assessee have been proved. Reliance was placed on the decision of this Court in ITAT No. 78 of 2017 in PCIT Versus M/s. BLB Cables and Contractors Private Limited dated 19.06.2018 for the same proposition. Reliance was placed on the decision of the Division Bench of this Court in CIT Versus Lakshmangarh Estate and Trading Company in ITA No. 270 of 1999 dated 07.10.2013 for the proposition that suspicion can never be taken as proof. Reliance was placed on the decision of the Division Bench of this Court in PCIT Versus Rungta Properties Private Limited ITAT No. 105 of 2016 dated 08.05.2017 wherein the Court affirmed the view taken by the First Appellate Authority holding that the assessing officer has not (1954) 26 ITR 775 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH doubted the genuineness of the documents placed on record by the assessee therein as in the case of the assessee before this Court. Reference was made to the decision of the High Court of Bombay in ITA No. 456 of 2007 in CIT Versus Mukesh Ratilal Morolia dated 07.09.2011 wherein the Court refused to interfere with the decision of the Tribunal holding that the purchase and sale of shares are genuine. The appeal filed by the revenue before the Hon’ble Supreme Court in Special Leave to Appeal (Civil Appeal No. 20146 of 2012) was dismissed by the order dated 27.01.2014. For similar proposition as to how the assessee has discharged the burden of proof, reliance was placed on the decision of the High Court of Punjab and Haryana in ITA No. 18 of 2017 in PCIT Versus Hitesh Gandhi dated 16.02.2017 and also the decision in PCIT Versus Prem Pal Gandhi in ITA No. 95 of 2017 dated 18.01.2018. Reliance was placed on the decision of the High Court of Gujarat in PCIT Versus Parasben Kasturchand Kochar in Tax Appeal No. 204 of 2020 dated 17.09.2020 wherein the revenue was unable to prove that the transaction was pre-arranged as well as sham and was carried out through penny scripts companies/paper companies and the appeal filed by the revenue was dismissed. Reliance was placed on the decision of the High Court of Delhi in PCIT Versus Smt. Krishna Devi 38 wherein the argument based on the theory of human behaviour and preponderance of probability was rejected and the investment made by the assessee in the said case was also in penny stocks. To explain the doctrine of merger, reliance was placed on the decision of the High Court of Gujarat (2021) 126 taxmann.com 80 ITAT NO. 06 OF 2022 AND ETC. BATCH in Nirma Industries Limited Versus DCIT 39. By placing reliance on the decision of the High Court of Rajasthan in CIT Versus Smt. Pushpa Malpani in ITA No. 50 of 2010 dated 15.11.2010, it is submitted that in the said case the Court found that at the time of the transaction the broker in question was not banned by SEBI and this finding was approved by the High Court and the appeal filed by the revenue was dismissed. Thus, Mr. Agarwal summed up his submission by contending that no adverse findings has been recorded against Surabhi Chemicals, the assessee, Smt. Swati Bajaj, is a bonafide investor was advised by an expert stock broker who has not come under adverse notice and the assessee had placed all the document before the assessing officer and the genuinity of the same has not been doubted by the assessing officer. Further it is submitted that the sale effected by the assessee cannot be stated to be when the prices were at the peak and the transaction cannot be treated to be a speculative transaction to bring it under Section 43(5) of the Act. Therefore, it is submitted that the orders passed by the tribunal may be affirmed.

22. Mr. Saurabh Bagaria, learned advocate appearing for the appellant in ITAT No. 138 of 2021 had painstakingly taken us through the assessment order dated 09.12.2016 and submitted that the assessee had made investment in reputed companies yet suffered long term capital loss. The assessing officer while issuing the show cause notice alleged that the dealing of penny stocks by the assessee was nothing but manipulation to book manufactured loss in connivance with entry operators through stock brokers, though the three companies were alleged to be such penny stocks (2006) 155 Taxman 330 (Guj) ITAT NO. 06 OF 2022 AND ETC. BATCH after reply was submitted by the assessee the assessing officer reconciled to the fact that one of the three companies cannot be branded as a penny stock. Further it is submitted that the assessee had held the stocks for more than 6 months. Further by referring to the paragraph 3.5 of the assessment order, it is submitted that the statements has been relied upon but the copy of the statement was not given to the assessee in spite of specific request that apart in the statement there is nothing alleged against the assessee, despite which, the addition was made. It is submitted that the assessee in the return of income had also mentioned about the short term capital gains on account of receipt of compensation received from the Government of Haryana for the land acquired from the assessee and this portion of the return has not been doubted. Further it is submitted that specific request was made by the assessee not only before the assessing officer but also before the First Appellate Authority to make available the persons from whom statements were recorded for being cross examined by the assessee. Furthermore, the details and documents produced by the assessee were never doubted either by the assessing officer or by the First Appellate Authority. Yet the appeal filed by the assessee was dismissed based on surmises and conjectures. Before the tribunal, the assessee had placed the facts and the learned tribunal in paragraph 4 of the impugned order notes the submissions made by the assessee and in paragraph 8 has dealt with factual position more particularly that the statement of the entry operators/promoters of the company nowhere mentions the name of the assessee alleging that he has adopted any dubious means for artificially rigging the share price. Therefore, it is submitted that the facts have been ITAT NO. 06 OF 2022 AND ETC. BATCH considered by the learned tribunal and this Court would not interfere with such factual findings.

23. Mr. Bagaria referred to the compilation of case laws and for the convenience of the court he has categorized case laws under the seven topics. To explain the concept of tax avoiders/tax planning and as to how the decision of the Hon’ble Supreme Court in McDowell was interpreted, reliance was placed on the decision of the Hon’ble Supreme Court in Union of India Versus Azadi Bachao Andolan 40. The learned counsel has elaborately referred to the various paragraphs of the decision and emphasized that all parties must have a common intention which is conspicuously missing in the assessees case. For the same proposition, reliance was placed on the decision of the Hon’ble Supreme Court in Vodafone International Holdings Versus Union of India 41 wherein the first question was regarding the correctness of the decision in Azadi Bachao Andolan. For the same proposition, reliance was placed on the decision of the High Court of Hyderabad in Hill Country Properties Limited Versus Goman Agro Farms Private Limited 42. Mr. Bagaria also referred to the decision of the House of Lords in IRC Versus Duke of Westminster 43 which has been extensively referred by the Hon’ble Supreme Court in Azadi Bachao Andolan. On the next topic namely when civil consequences entails rules of natural justice must be complied with, reliance was placed on the decision of the Hon’ble Supreme Court in (2004) 10 SCC 1 (2012) 341 ITR 1 (SC) (2015) SCC Online Hyd. 1021 (1936) AC – 1 ITAT NO. 06 OF 2022 AND ETC. BATCH Sahara India Versus CIT 44 and Kothari Filaments Versus CC 45. It is further submitted that in spite of specific request made by the assessee to provide the persons from whom statements were recorded for cross examination, they have not been produced and this clearly amounts to violation of principles of natural justice. To support such argument reliance was placed on the decision in Andaman Timber Industries Versus CCE 46, Kishinchand Chellaram Versus CIT 47, Arya Abhushan Bandhar Versus Union of India 48 and the judgment of this Court in CIT (E), Kolkata Versus Mayapur Dham Pilgrim and Visitors Trust in ITAT NO. 312 of 2017 dated 16.02.2022.

24. To explain the concept of commercial expediency as to how the assessing officer cannot sit in the chair of the assessee, reliance was placed on the decision of the Hon’ble Supreme Court in S.A. Builders Versus CIT (Appeals) 49. Reliance was also placed on the decision of the High Court of Delhi in Jain Manufacturing (India) Private Limited Versus The Commissioner 50 wherein the Court set aside the order cancelling the registration of a dealer under the Central Sales Tax Act with retrospective effect and held that retrospective cancellation should not prejudicially affect the party who acted on the basis of the valid registration. This judgment is pressed into service to support the contention that on the date when the assessee had purchased the shares there was no allegation against the (2008) 14 SCC 151 (2009) 2 SCC 192 (2015) 324 ELT 641 (SC) (1980) Supplementary SCC 660 (2002) (143) ELT 25 (SC) (2007) 1 SCC 781 (2016) 93 VST 326 ITAT NO. 06 OF 2022 AND ETC. BATCH company or the stock broker or any other person and therefore any investigation done subsequently cannot work prejudice to the assessee who is a genuine investor.

25. It is submitted that the revenue largely emphasized on the concept of circumstantial evidence which according to the revenue was available to lead to the conclusion that the claim of LTCG/STCL was bogus. To explain the concept of circumstantial evidence and the cardinal principles which the court has to follow, reliance was placed on the decision of the Hon’ble Supreme Court in State of Uttar Pradesh Versus Satish 51, Chintalapati S. Raju Versus SEBI 52. Further it is submitted that very recently the Hon’ble Supreme Court in Balram Garg Versus SEBI in CA No. 7054 of 2021 dated April 19, 2022 considered the decisions in the case of Kishore R. Ajmera heavily relied upon by the revenue and had observed that unless there are foundational facts, question of relied upon circumstantial evidence could not arise. It is submitted that the reasonable expectation of the assessee is to know the things which obviously can be based on reasonable inference drawn from foundational facts which is missing in the assessee’s case. The learned advocate referred to the decision of the Hon’ble Supreme Court in Gorkha Security Services Versus Government (NCT of Delhi) 53 to explain the concept of prejudice as to how the assessee has been prejudiced on account of non-supply of the materials, statements, report, not affording opportunity for cross examination etc. Lastly, it was contended that the investigation report which appears to be (2005) 3 SCC 114 (2018) 7 SCC 443 (2014) 9 SCC 105 ITAT NO. 06 OF 2022 AND ETC. BATCH the basis of the entire matter was not given to the assessee in spite of specific request made by the assessee, that apart the genuineness of the documents which were placed by the assessee was never doubted by the assessing officer or the First Appellate Authority and those documents where rightly taken note of the by the tribunal and the appeal filed by the assessee was allowed and the same would not call for any inference. Mr. Bagaria submitted that he has also been instructed to appear in ITAT No. 168 of 2021 wherein the assessee had invested in the shares of M/s. Esteemed Bio Organics though the trading activities of the said company was initially suspended subsequently SEBI had lifted the ban and exonerated the said company. With the above submission the learned advocate prayed for affirming order passed by the tribunal and dismissing the appeal filed by the revenue.

26. Mr. S.M. Surana, Learned Senior advocate appearing for the appellants in ITAT No. 156 of 2021, 157 of 2021 submitted that there is a small distinction in the case of the assessees than the other cases which were argued before this Court as the orders impugned in these appeals, passed by the Learned Tribunal arise out of an order passed by the Commissioner of Income Tax under Section 263 of the Act. Therefore, it is submitted that in the course of his argument he would seek to sustain the order of the tribunal not only on the grounds which were canvassed by the other learned advocates for the assessees but more importantly on the ground that the Commissioner could not have exercised his power under Section 263 of the Act. The Learned Senior Counsel referred to the facts in ITAT No. 156 of 2021 wherein the assessee is Mr. Girish Tikmani, it is ITAT NO. 06 OF 2022 AND ETC. BATCH submitted that the assessing officer examined the return of income filed by the assessee in declaring the total income of Rs. 6,76,490/- and the return which was processed under Section 143(1) of the Act, was selected for scrutiny and subsequently the assessing officer issued notices under Section 143(2) and 142(1) of the Act. In response to such notice the assessee appeared through his authorized representative from time to time and produced details and documents as called for which were test checked and the case was discussed and thereafter the assessment was completed by the order dated 29.07.2016. The assessing officer stated that on perusal of the details submitted by the assessee that during the financial year 2013-2014 relevant to assessment year 2014-2015, the assessee derived income from LTCG and claimed exemption under Section 10(38) of the Act. Further the assessing officer noted that the assessee had made share transactions through M/s. SHCIL Services Limited. On noting that a letter was sent by the assessing officer under Section 133(6) of the Act to M/s. SHCIL for verification of the transactions done by the assessee regarding sale of shares from the reply received from M/s. SHCIL, the details appear to have been confirmed with the details furnished by the assessee and the assessing officer also noted that all transactions were made through banking channels and no discordance has been found in the transactions and accordingly, the total income was computed. It is submitted that the assessing officer noted that the transactions were done by the assessee through a public sector undertaking and to establish the same, the learned senior counsel referred to write up about the SHCIL downloaded from the goggle to show that it is the public sector undertaking and therefore the question of doubting the ITAT NO. 06 OF 2022 AND ETC. BATCH bona fides of the sale transactions done by the assessee does not arise. Further it is submitted that the assessing officer after issuance of the notices under Section 143(2) and 142(1) of the Act had called for details and documents which were furnished by the assessee and after discussing the case and also verifying the fact from M/s. SHCIL by intimation under Section 133(6) of the Act, the assessment was completed and the assessment could not have been set aside by the Commissioner by invoking his powers under Section 263 of the Act. It is submitted that the learned Commissioner had pre-decided the issue even at the stage of issuance of the show cause notice under Section 263 of the Act. In the order dated 10.12.2018 passed under Section 263, the learned Commissioner would state that the assessees return of income was selected for scrutiny on the ground of suspicious LTCG based on inputs from investigation done. Further it was stated that an error was detected in the assessment order and proposal was received by the Commissioner for review of the assessment order under Section 263 of the Act. Further the Commissioner would state that prima facie it appears the assessing officer had failed to take a logical action on the information available with him and accordingly the assessment order is erroneous in so far as it was prejudicial to interest of revenue. It is submitted that this was the basis on which the show cause notice date 06.11.2018 was issued and in the said show cause notice reference was made to an investigation done by the Directorate of Income Tax (Investigation), Kolkata regarding the accommodation entry of LTCG and number of beneficiaries who have taken huge amount of bogus LTCG were identified and this led to the identification of penny stocks which have been ITAT NO. 06 OF 2022 AND ETC. BATCH used for generating bogus LTCG. The Commissioner referred to the scripts of Unno Industries Limited which were traded by the assessee and without mentioning any details, the assessee was called upon to show cause as to why the assessment order should not be rendered as erroneous and prejudicial to the interest of revenue as the assessing officer should have treated the LTCG claimed by the assessee as bogus. It is submitted that the Commissioner foreclosed the issue and reduced the show cause notice as an empty formality. The assessee submitted their written submissions and also documents before the Commissioner. The Commissioner thereafter proceeded to hold that credible information was available with the assessing officer from which it was clear that the assessee had adopted the practice of accepting accommodation entries and in turn availed bogus LTCG, the assessee had benefited by trading and making manipulations in the scripts of Unno Industries Limited and claimed exemption under Section 10(38) of the Act. Thereafter the Commissioner proceeds to extract the report said to have been prepared by the Director General of Income Tax Investigation, West Bengal and observed that the scripts of Unno Industries Limited was suspended by the SEBI for price rigging and insider trading. In paragraph 5.6.3 and 5.6.4 of the order dated 10.12.2018, the Commissioner notes the transaction done by the assessee with regard to the shares of Unno Industries Limited and states that after completion of one year the assessee sold the shares which he had purchased at Rs 1.25 paisa was sold at Rs. 30/31, with an increase of about 25 times. The Commissioner blames the assessee for not submitting the details of the commissions paid by the assessee. Thereafter certain decisions have been referred to and following ITAT NO. 06 OF 2022 AND ETC. BATCH decisions of the tribunal in Sanjay Bimalchand Jain Versus PCIT, Nagpur 54 and the judgment of the Hon’ble Supreme Court in N.K Proteins Limited Versus DCIT 55 passed an order to the effect that the sum of Rs. 24,35,006/- is an unexplained cash credit under Section 68 of the Act and accordingly directed the assessing officer to re-assess the income of the assessee for the relevant assessment years.

27. It is submitted that the assumption of jurisdiction by the Commissioner under Section 263 of the Act is unsustainable and the order is in violation of the principles of natural justice as even at the stage of issuance of show cause notice the Commissioner had pre-decided the issue. Furthermore, the allegation against the assessing officer is that he failed to take a logical action which cannot be a ground to invoke Section 263 of the Act. Furthermore, the copy of the report which has been referred to, was not furnished to the assessee. That apart the “report” is not a report and it has been submitted by an authority who is lowest in the hierarchy of authorities in the Income Tax Investigation department. It is submitted that in the Income Tax department more particularly in the investigation wing, the top most authority is the CBDT through its Member Investigation, followed by the Principal Director General of Income Tax (Investigation), Director General of Income Tax (Investigation), Director of Income Tax (Investigation), Additional Director of Income Tax, (Investigation) and lastly the Deputy Director of Income Tax (Investigation)/Additional Director of Income Tax (Investigation). It is submitted that the copy of the so-called investigation (2018) 89 Taxmann.com 196 (Bom) (2017) 84 Taxmann.com 195 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH report was relied on by the senior standing counsel for the department during the course of argument and stated that it can be downloaded from www.taxguru.im. It is submitted that the “report” is not available in the official website of the CBDT or the Income Tax Investigation department. It is further submitted that the author of the “report” himself states that it is a write up and the same could not have been basis for setting aside the assessment order by invoking the power under Section 263 of the Act. Further it is submitted that there are several flaws in the “report” and nowhere the name of the stock broker through whom the assessee had transacted namely SHCL nor the name of the assessee features. The learned senior counsel has elaborately referred to the “report” and pointed out that the report is thoroughly flawed, they are all personal comments of the concerned officer who is in the rank of the Deputy Director of Income Tax (Investigation) and the “report” is not the report of the department and there is no direction issued by the department to conduct investigation as there is nothing mentioned in the said report. Further it is submitted that the “report” states that there is a bogus LTCG claim of nearly Rs. 38,000 crores. However, this figure has been arrived at based on total trade value. To explain what is trade value, the learned senior counsel produced a write up stated to have been downloaded from the google and it is submitted that trade value is the total amount of buy and sell trades taken place at a time. Therefore, the so-called figure of Rs. 38,000 crores does not represent the alleged sale value but it is a trade value which includes the purchase value as well. Therefore, the figures mentioned are incorrect and reliance cannot be placed on the said “report”. Further it is submitted that the assessees ITAT NO. 06 OF 2022 AND ETC. BATCH entire investment is in shares and mutual funds and to strengthen this argument, the copy of the profit and loss account and the balance sheet of the assessee for the relevant assessment year was produced. Further it is submitted that in one of the trading done by the assessee namely with regard to the shares of the CCL International, a reputed TV Channel, ZEE Bis.com had given a buy call widely published in the media and therefore to state that the transaction was bogus is unsustainable, more so when the assessees stock broker is a public sector undertaking. Further it is submitted that merely because there is escalation of the price of the shares, it cannot be stated that the transaction is bogus. In this regard, the various facts and figures were referred to for the purpose of showing the market trend. Nextly, the learned senior counsel referred to the various provisions of the Securities Contract (Regulation) Act 1956, (SCR). More particularly Section 2(a) which defines contract, 2(ac) which defines derivatives to include securities, Section 2(h) which defines securities to include shares, scripts, stocks, bonds etc. Section 2(j) which defines stock exchange. It is submitted that the contract entered into in terms of the provisions of the Securities Contract Act cannot be treated to be bogus. A stock exchange has to be recognized by the Central Government in terms of Section 9 of the said Act and in terms of Sub-Section (2) of Section 9, any recognized stock exchange with the previous approval of SEBI may make by-laws for the regulation and control of the contract and in terms of clause (k), by-law can be framed for regulating the contract between members or between a member and its constituent or between a member and the person who is not a member etc. Further the by-laws of the stock exchange in terms of clause ITAT NO. 06 OF 2022 AND ETC. BATCH

(r) also provides for making, comparing,, settling and closing of bargains. Further there is an obligation on the member of a stock exchange to supply information or explanation and to produce documents relating to their business as the governing body of the stock exchange may require. Further it is submitted that if in the opinion of the SEBI, there was insider trading and rigging of the share prices they could have taken appropriate action. The contract has not been cancelled by the SEBI nor termed to be bogus contract. SEBI could have delisted the company and they also have power to demolish any syndicate if found. However, no such action was taken by SEBI and even in cases where the trading was suspended for a brief while by SEBI, subsequently the order of suspension has been revoked and the shares of the companies are freely tradable. Nextly the learned senior counsel proceeded to refer to the case laws compilation. To support his contention that the show cause notice issued by the Commissioner under Section 263 dated 06.11.2018 was bad in law as it was not issued with an open mind and the assessees case was pre-decided by the CIT, reliance was placed on the decision in Oryx Fisheries Private Limited Versus Union of India 56. Further it is reiterated that the “report” is not a report of the Government of India or the CBDT or by the head of the Income Tax Investigation department as there is nothing placed on record to show that investigation was directed to be conducted. Further it is reiterated that the officer who stated to have submitted the “report” himself states that it to be a write up and therefore it is his personal opinion. In any event such “report” is not binding as it is not a judgment, to support such contention 266 (ELT) 422 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH reliance was placed on the decision in Sesa Sterlite Limited Versus Assistant Commissioner of Income Tax and Others 57 for the proposition on whom the onus of proof would lie, reliance was placed on the decision of the Learned tribunal in PCIT, Kolkata Versus Rajrani Export Private Limited in ITA No. 1402/Kol/2011 dated 31.05.2012 which order was affirmed by this Court in CIT Versus Rajrani Export Private Limited 58. It is further submitted that the entire disallowance as made by the Commissioner is based on third party information said to have been gathered by the alleged investigation and the same could not have been relied upon without independent verification either by the assessing officer/CIT. To support such contention reliance was placed on the decision of the Hon’ble Supreme Court in Commissioner of Income Tax Versus Odeon Builders Private Limited 59.

28. The next argument of the learned senior counsel is that on the grounds mentioned by the Commissioner in the show cause notice, power under Section 263 could not have been exercised and such power could have been exercised only when the assessing officer failed to conduct an enquiry which is not the case of the assessee before this Court. With regard to under what circumstances the power under Section 263 could be invoked and the parameters to be fulfilled, reliance was placed on the decision in Commissioner of Income Tax Versus JN Morison India 366 ITR which was referred to by the learned tribunal. For the same proposition reference was made to the decision in PCIT Versus M/s. Kesoram Industries (2019) 417 ITR 334 (Bom) 361 ITR 162 (2019) 418 ITR 315 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH Limited 60. Nextly, the learned senior counsel elaborately referred to the order passed by the tribunal, impugned before us and submitted that elaborate discussion on the facts has been done, the learned tribunal rightly held that there is no material quoted against the assessee and the power under Section 263 could not have been invoked on a mere suspicion. To support the above arguments, reliance was placed on the decision in Commissioner of Income Tax Versus Mangilal Didwania 61, Commissioner of Income Tax Versus Kavita Gupta 62 Commissioner of Income Tax Versus Saroj Devi 63, Commissioner of Income Tax Versus Mehrotra Brothers 64. Reliance was placed on the decision of the Hon’ble Division Bench of the High Court of Madras in Commissioner of Income Tax Versus Amalgamations Limited 65 to support the argument that when tribunal has found that there is no error of fact in the order of assessment and the Commissioner has not indicated any error in law committed by the assessing officer, the power under Section 263 cannot be invoked on assumptions. To explain under what circumstances the power under Section 263 can be invoked, reliance was placed on the decision in Commissioner of Income Tax Versus South East Construction Company Limited. Further it is submitted that general observations cannot be a basis for an addition and to support such proposition, reliance was placed on the decision of the High Court of Madras in The Commissioner of Income Tax, Chennai Versus M/s. Accel Limited 421 of 2012 dated 02.08.2021. 423 ITR 180 (Kolkata) 286 ITR 126 (Raj) 211 ITR 206 (All) 178 ITR 598 (All) (2004) 270 ITR 157 (MP) (1998) 238 ITR 963 (Mad) ITAT NO. 06 OF 2022 AND ETC. BATCH Reliance was also placed on the decision of the High Court of Rajasthan in Smt. Harshila Chordia Versus Income-Tax Officer 298 ITR 349 (Rajasthan). Further the learned senior counsel explained as to how the transaction was done by the assessee to establish bona fides. Further it is submitted that the department does not allege that the sale affected by the assessee to be bogus, but they used an expression “pre-arranged” sale, for which no material was referred to by the Commissioner or placed by the revenue before the learned tribunal.

29. The learned Senior Counsel submitted that if the Assessing Officer had failed to make an enquiry, it is a duty cast upon the CIT(A) to conduct an enquiry which he failed to do. Further, the Commissioner while exercising the power under Section 263 of the Act has to come to a firm decision that the order of the Assessing Officer was erroneous and was prejudicial to the interest of revenue and on a reading of the order passed by the Commissioner, it is clear that no firm decision has been arrived at by the Commissioner more particularly from the language adopted in the said order. To support such contention, reliance was placed on the decision in the case of Commissioner of Income Tax vs. Kanda Rice Mills 66 . For the same proposition reliance was placed on the decision in Uma Charan Shaw & Bros. Versus CIT 67 . Further, the learned Senior Counsel reiterated that suspicion can never take the place of proof. To support such argument, reliance was placed on the decision of CIT, Central-II, Calcutta Versus 1989 178 ITR 446 (P&H) 37 ITR 271 SC ITAT NO. 06 OF 2022 AND ETC. BATCH Lakshmangarh Estate & Trading Co. Ltd.68 dated 7th October, 2017. Reliance was placed on the decision in CIT Versus Smt. Jamna Devi Agarwala69, wherein the Court had distinguished the decision in Sumati Dayal. In support of his contention that the transactions were genuine as documents were produced by the assessee, reliance was placed on the decision in CIT Versus Anupam Kapoor 70 and the decision in PCIT Versus Parasben Kasturchand Kochar, in Tax Appeal No. 204 of 2020 dated 17.09.2020 (Gujarat). Learned Senior Counsel submitted that the word “consider” finds place in Section 263 of the Act and this term was explained by the Hon’ble Supreme Court in Bhikhubhai Vihlabhai Patel Versus State of Gujarat 71 which was relied on in the case of Hotel Regal International & Anr. Versus ITO & Another, WP No. 22950 (W) of 2009 in the High Court at Calcutta. To explain the meaning of the term “opinion”, reference was made to P. Ramanatha Aiyar’s The Law Lexicon, 2 nd Edition which has defined “opinion” to mean a view, a statement. In this regard, reliance was placed on the decision of the Hon’ble Supreme Court in The Barium Chemicals Ltd. & Anr. Versus The Company Law Board & Ors. 72 It is submitted that the learned Senior Standing Counsel had argued that the transaction done by the assessee in the purchase of the shares of penny stock companies is of the nature of an adventure and to explain this concept, reliance was placed on the decision of this Court in ITO, “A” Ward, ITA No. 270 of 1999 328 ITR 656 (Bom) 299 ITR 179 (P&H) 2008 4 SCC 144 1967 AIR 295 ITAT NO. 06 OF 2022 AND ETC. BATCH District (A), & Ors. Versus R. L. Rajghoria 73 and such argument was never raised by the revenue before the Tribunal and therefore, cannot be permitted to be raised for the first time before this Court. To support such contention, reliance was placed on the decision of this Court in V.P. Samtani Versus CIT, West Bengal-IV 74 and CIT Versus Indocount Finance Ltd.75 Further, it is submitted that the decisions referred to by the learned Senior Standing Counsel in the case of B.C. Jain, Manish D. Jain, Pinki Jain are distinguishably and the facts were entirely different and if the circumstances are different, the decisions cannot be applied to the assessee’s case as each case depends upon its own facts. In support of such contention, reliance was placed on the decision of the Hon’ble Supreme Court in Megh Singh Versus State of Punjab 76 . The learned Senior Counsel produced a note on the modus operandi of share transactions which are being done. The learned Senior Counsel referred to the risk management framework as published by SEBI to explain as to how the share market functions. With the above submissions, the learned Senior Counsel prayed for sustaining the order passed by the Tribunal.

30. Mr. Pratyush Jhunjhunwala, learned Advocate appearing for the assessee in ITA No. 139 of 2021 submitted that the Assessing Officer in his order states that there is direct evidence, if so, such evidence ought to have been furnished to the assessee. Further the assessee had given a detailed explanation on 15.11.2017 which has been completely ignored by the Assessing Officer. The contention raised by the assessee before the (1979) 119 ITR 872 (Cal) (1982) 135 ITR 313 (Cal) (2004) 186 CTR Del 659 AIR 2003 SC 3184 ITAT NO. 06 OF 2022 AND ETC. BATCH Assessing Officer was reiterated before the CIT(A), which has been noted in paragraph 4.2 of his order. That apart in paragraph 4.3, the CIT(A) notes that documents were produced by the assessee. However, in paragraph 4.24 the CIT(A) erroneously came to a conclusion that there was no documentary evidence. That apart, the assessee had invested in the purchase of shares of M/s. Jackson Investment Ltd. during October, 2012 and the shares were sold only in the assessment year 2015-16 and not immediately after the expiry of one year. It is pointed out that similar investment made by the other assessees in Jackson Investment was subject matter of consideration in appeals filed by the assessees before the Delhi Tribunal in ITO Versus Anupama Garg & Ors.77 and the said decision would clearly apply to the case of the assessee herein. Further it is submitted that the assessee had produced sufficient documents to prove the genuineness of the share transaction done by him and the investigation which has been referred by the Assessing Officer does not mention anything about the assessee. Therefore, there was absolutely no ground for the Assessing Officer and the CIT(A) to have rejected the evidence produced by the assessee and in support of such argument, reliance was placed on the decision of the Hon’ble Supreme Court in Sreelekha Banerjee Versus CIT 78 . Further, the learned Advocate referred to the computation of income of the assessee for the relevant assessment year, 2015-16, to demonstrate that the assessee has been investing in well known companies. It is argued that the findings rendered by the assessing officer and the CIT(A) are clearly based on 2018 SCC Online ITAT 2923 (1963) 49 ITR 112 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH surmises and conjectures and the department is required to bring in some evidence to doubt the genuinity of the transaction done by the assessee. In support of such contention, reliance was placed on the decision in CIT Versus Orissa Corpn, (P.) Ltd. 79 To support his argument that under Section 133(6) of the Act, the Assessing Officer is empowered to issue notice calling for genuine information for the purpose of any enquiry even in a case where proceeding is not pending against the assessee, obtaining approval of the director or Commissioner, before issuance of notice and such power should have been exercised by the Assessing Officer and without doing so, the assessment could not have been completed based on presumptions and assumptions. In support of such contention, reliance was placed on the decision of the Hon’ble Supreme Court in Kathiroor Service Cooperative Bank Ltd. Versus CIT (CIB )80. The decision of the Hon’ble Supreme Court in Kishinchand Chellaram Vesus CIT 81 was relied on for the proposition that before the Income Tax Authority could rely upon any evidence they are bound to produce, the same before the assessee so that the assessee could controvert the statement contained in it by seeking opportunities to cross- examine such persons from whom statement was recorded. Therefore, it is submitted that considering the fact that the assessee has proved the genuinity of the transaction, the Tribunal rightly allowed the assessee’s appeal and prayed for sustaining the order.

31. Mr. Arif Ali, the learned Advocate appearing for the assessee Gupta Agarwal respondent in ITAT 44 of 2020 submitted that the grounds raised (1986) 25 Taxman 80F (SC) (2013) 39 Taxmann.com 49 (SC) (1980) 4 Taxman 29 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH by the revenue in the memorandum of appeal does not relate to the assessee’s case as the assessee’s case is not one of LTCG, the assessee did not trade in the shares of M/s. Blue Print but had purchased shares of Sulav Engineering and the facts are entirely wrong. Further, the assessee had purchased the shares through online mode and not through offline mode and availed the services of a reputed broker, the assessee is a regular trader and the assessee had effected the transaction through disclosed source and to the said effect, materials were produced. However, the assessing officer erroneously brushed aside all these by holding that human conduct raises a presumption of bogus claim. Therefore, it is submitted that considering these factors, the learned Tribunal had rightly allowed the appeal.

32. Mr. Aryak Dutta, learned Senior Standing Counsel by way of reply had referred to paragraph 14 of the assessment order in the case of Swati Bajaj and submitted that the company has paid only Rs. 38 lakhs as income tax during the relevant year and it is incorrect on the part of the assessee to state that the company is a robust company. Further, it is submitted that there are three brokers involved in the entire operations and that has been mentioned by the assessing officer in his order and the modus adopted by the assessee has also been brought out. With regard to the decision in the case of T. Takano relied on by Mr. Agarwal it has been held that the right to disclosure is not an absolute right and more importantly, in the cases on hand the report does not deal with the assessee but with the company and the assessee does not identify himself with the company. Furthermore, the report contains third party information and if it was disclosed at the relevant ITAT NO. 06 OF 2022 AND ETC. BATCH time, it will affect the entire security market and therefore, no prejudice has been caused to the assessee on account of non-furnishing of the copy of the investigation report. Reliance was placed on the decision of the Hon’ble Supreme Court in SEBI Versus Mega Corporation Ltd. 82 , wherein the claim made by the company for cross-examination was rejected.

33. Mr. Om Narayan Rai in his reply submitted that the claim made by the assessee under Section 10 (38) of the Act is a claim for exemption and the assessee is duty-bound to show that no addition can be made under the Section 68 of the Act. Unless the assessee discharges the burden, he is not entitled to any relief and the assessing officer is justified in making addition under Section 68 of the Act. It is reiterated that the trinity test has to be satisfied namely, the identity, genuineness and creditworthiness and more importantly, the investigation did not commence from the assessee but it commenced from the company, the stock brothers who were involved in the purchase and sale of the penny stock. Therefore, the creditworthiness and genuinity and identity need to be proved at the other end to enable the assessee to be entitled for exemption under Section 10(38) of the Act. In all the cases, the assessee has failed to satisfy the trinity test and therefore, the assessing officer was justified in making the addition. It is further submitted that Mr. Bagaria had argued that the law laid down in K.R. Ajmera is no longer good law which submission is incorrect and to demonstrate the same Paragraph 47 of the decision in Balram Garg was referred to and submitted that the law laid down in K.R. Ajmera is good law and has not been overruled.

2022 SCC Online (SC) 361 ITAT NO. 06 OF 2022 AND ETC. BATCH

34. Furthermore, in a later decision in Chintalapati S. Raju, the decision in R. Ajmera was referred to and therefore the decision in R. Ajmera has not been overruled. Hence the test laid down in R. Ajmera more particularly in paragraph 26 has to be fulfilled. Referring to paragraph 13.2 of Chintalapati S. Raju, it is submitted that in the said case the onus was on SEBI whereas under Section 68, the onus is on the assessee and the requirements under the SEBI Act were totally different from that of the requirements to be complied with under the Income Tax Act. It is reiterated that the credit worthiness of the company has not been proved and therefore one of the crucial tests has not been fulfilled and the assessing officer was justified in making the addition. In support of such contention, reliance was placed on the decision in PCIT Versus NRA Iron and Steel Private Limited 83 .This decision is pressed into service to emphasis that the credit worthiness of the buyer has to be established. With regard to the arguments of Mr. Surana that the investigation report is only a write up, it is submitted that may a write up from pages 4 to 28 and the report and the details based on which the report has been brought out from pages 29 to 401. Therefore, it is incorrect to state that the report cannot be looked into. It is further submitted that the learned advocates for the assessees had argued that the various decisions relied on by the revenue are distinguishable. In this regard, certain factual findings in those decisions were referred to. It is submitted that what is required to be looked into in a judgment is the principle which has been laid down which is termed as the “ratio” and to explain this aspect reliance was placed on the decision in Punjab Land (2019) 15 SCC 529 ITAT NO. 06 OF 2022 AND ETC. BATCH Development & Reclamation Corporation Limited Versus Presiding Officer, Labour Court 84. Therefore, it submitted that what is crucial is the source of the source has to be established and the onus is on the assessee. Mr. Bagaria by way of submission in rejoinder, contended that the revenue had referred to the decision in the case of CIT Versus Redington 85 and in the said decision, the Court found that there were foundational facts which are conspicuously absent in the assessees case.

35. We have elaborately heard the learned standing counsels for the appellant department as well as the learned senior counsel and the learned advocates for the assessees.

36. In the batch of cases which we have heard together, there are broadly two categories. The first category of cases are which were dealt with by the tribunal by a common order dated 26.06.2019 in which 90 appeals filed by the assessees were allowed, though all 90 cases are not before us, substantial number of cases are on appeal before us and the lead case is that of the assessee Smt. Swati Bajaj. For arriving at a decision in the first category of cases, it would suffice to note the factual position in the case of Swati Bajaj as the learned tribunal had discussed the facts of the said assessee alone and taken a decision to allow the appeal and thereafter proceeds to hold that the said decision will apply to the other 89 appeals as well. The second category of cases are those where the assessee challenged the assumption of jurisdiction by the Commissioner of Income Tax under Section 263 of the Act. Even in those cases there are certain findings (1990) 3 SCC 683 (2021) 430 ITR 298 (Mad) ITAT NO. 06 OF 2022 AND ETC. BATCH rendered by the tribunal which are more or less identical to the batch of 90 appeals which were allowed by the tribunal. With regard to the correctness of assumption of jurisdiction under Section 263 of the Act, we shall deal with them separately in the course of this judgment. Reverting back to the case of the assessee Smt. Swati Bajaj, it is seen that she had filed her return of income declaring a total income of Rs. 6,57,300/-. The return was selected for scrutiny, notices under Section 143(2) and 142(1) of the Act were issued, served on the assessee pursuant to which she was represented by her authorized representatives and produced the documents in compliance with the notice issued under Section 142(1) of the Act. The assessing officer states that during the course of assessment proceedings, the assessee Smt. Swati Bajaj was asked to produce the details of shares purchased and sold during the assessment year under consideration and immediate three preceding years in respect of STT paid in LTCG/LTCL and called upon to explain with supporting evidence that the genuineness of the earned LTCG. In response to such notice the assessee stated that the assessing officer has mentioned that specific information has been received from the Director of Income Tax (Investigation), Kolkata that the company Surabhi Chemicals and Investment Limited in which the assessee had purchased and sold shares is a penny stock company which is used for providing entries for bogus LTCG. The assessee stated that there is no mention of any specific information either against the assessee or against Surabhi Chemicals in the letter of the assessing officer and it is a general statement or stated to be based on an enquiry conducted by Director of Income Tax (Investigation) on the transaction of some other companies or ITAT NO. 06 OF 2022 AND ETC. BATCH equity broker. Therefore, the assessee requested to furnish specific details of manipulation or connivance carried out by either of the concerned persons directly related to the equity shares of the said company in which the assessee had traded. Further the assessee would state that any general information relating to other company’s shares cannot be the basis for casting allegations of suspicion and treating a transaction in-genuine, as no addition can be made based on suspicion and surmises. Further unless there are corroborative materials, the transaction done by the assessee cannot be doubted. It was further stated if certain allegations are made against the stock broker having devised a scheme to convert unaccounted money to accounted income, there should be specific allegation against the assessees stock broker Horizon Financial who are reputed brokers and there is no specific information or allegations against Horizon Financial. Further the assessee stated that if there is any specific incident of any admission of price rigging as per the report of the Director of Income Tax, (Investigation) pointing towards the assessee, the said person may be made available for cross examination and without affording such an opportunity action cannot be initiated. Further the assessee would state that Surabhi Chemicals is a robust company, referred to its annual report and also mentioned about the profit earned by the company before tax, the tax paid by the said company for the year 2012-2013 when the assessee purchased the shares and also the profit before tax and the tax paid by the company in the year of sale of the shares by the assessee. Further the Surabhi Chemicals has sufficient business and financial assets and therefore the allegations made against the company are unfounded and misleading. Further the assessee stated that ITAT NO. 06 OF 2022 AND ETC. BATCH she is a regular investor in equity shares and mutual funds in companies listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and she has been earning capital gains and they have been accordingly taxed as per the provisions of the Act. Further the investment made by the assessee is based upon feedback/tips of the peers of the investment industry and also based on research reports published in business newspapers/journals/analyst report. Further the assessee stated that in that process she had made investment in the equity share of Surabhi Chemicals quoted on the BSE. Further it was mentioned that the assessee fails to understand as to on what basis they had classified the shares of Surabhi Chemicals as a penny stock though the assessee received bonus from the said company, dividend from the said company and the prominent share analyst and research company Abhron Consultancy Services Private Limited issued a buy-call on the shares of the Surabhi Chemicals and since the assessee is a regular investor, she made such investment. The assessee stated that the payment was made by account payee cheque from the regular bank account, produced copies of the purchase bill and other documents. Further the assessee stated about the investment, how the bonus shares were declared and how the assessee had sent the transferred shares for D-Mat. Thus, the assessee would submit that the equity shares were in D-Mat account and all payments made/received were through proper banking channels and STT was paid at the point of sale of the shares and the shares were sold through BSE and the relevant contract notes for the sale of shares were produced. Further the assessee stated that from the details of LTCG, it is seen that the assessee had initially incurred a loss of ITAT NO. 06 OF 2022 AND ETC. BATCH Rs. 70,765/- rather than earning profit. After relying upon the various decisions, the assessee stated that she has proper documents to prove the genuineness of the transactions and the sale was made through recognized stock exchange i.e BSE after payment of applicable STT. The share broker is a reputed person, the research report based on which investment was made was also by a reputed consultancy agency and in the absence of any specific material against the assessee coupled with the fact that the assessee has fully and truly disclosed all facts with supporting evidence the question of invoking Section 68 of the Act does not suffice. The case was discussed by the assessing officer who notes that in response to the notice issued under Section 142(1) the assessee had produced details which were called for. Thereafter the assessing officer proceeds to analyze the investment made by the assessee and notes that assessee purchased 50,000 shares of M/s. Surabhi Chemicals for Rs. 1,00,000/- on 16.03.2012 and 14.08.2012 and after completion of one year and few months, when the investment in shares becomes eligible for LTCG it was sold for Rs. 29,23,500/- between 04.12.2013 to 07.12.2013 and LTCG was computed for Rs. 28,23,500/- which will show that the assessee has managed to increase the amount by 2823 % in a short span of 17 to 21 months that to when the general market trend was recessive during the relevant period of time. After mentioning these details, the assessing officer proceeded to take note of the letter of a Directorate of Investigation dated 03.07.2015. After elaborately referring to the said letter wherein it was reported that prices of shares of some penny stocks were artificially rigged to benefit some assessees through bogus claim of LTCG, the assessing officer notes that the prices of the shares of Surabhi ITAT NO. 06 OF 2022 AND ETC. BATCH Chemicals were also rigged for providing bogus LTCG and all the features of the companies which were used for providing bogus LTCG are clearly matching with the trend of the shares of M/s. Surabhi Chemicals and the trade pattern of the shares follow a “bell shape”. The company Surabhi Chemicals had hardly any business activity, splitting of shares had taken place and after splitting of shares the prices of the shares on the exchange goes down automatically in proportion with the ratio of split and one does not seem anything adverse happening in the scrip. This according to the assessing officer was adopted by the company to avoid any hype on such rise in the prices of the shares. Further the shares of Surabhi Chemicals were very thinly traded and gradually jacked to a desired level in a period of one year so as to provide desired amount to selected beneficiary. Further the movement in the price of the shares were not backed by any fundamentals of the company, the company did not make any announcement nor does it have any history of declaring dividends from the financial year 2009-2010 up the financial year 2013-2014. Further the assessing officer noted that from December 2011 to August 2013, the share market was almost flat and even the investment in peers have not resulted in any gain but the share of Surabhi Chemicals had risen to such a level without any fundamentals which is beyond imagination of anyone. Therefore, the assessing officer observed that the facts and circumstances compels him to see the transactions entered into by the assessee in a larger frame of accommodation entry scam as reported. Further investments of the assessee in a company having no financial worth did not confirm to normal behaviour of an investor and the behaviour of the assessee does not appear to be real.
ITAT NO. 06 OF 2022 AND ETC. BATCH The assessing officer placed reliance on the decision in Durga Prasad More and held that surrounding circumstances and test of human probabilities has to be applied in the assessees case coupled with the report of the Director of Investigation to hold that the assessee had entered into pre- designed modes of transactions and invested in the shares of Surabhi Chemicals just to convert unaccounted cash under the guise of LTCG and therefore proceeded to treat the LTCG amount of Rs. 28,23,500/- as income from undisclosed sources and denied claim of exemption as LTCG. The assessee preferred appeal before the Commissioner of Income Tax (Appeals) (CIT (A)).

37. In the preceding paragraphs of this judgment, we have referred to the grounds raised by the assessee before the CIT and the various decisions which were referred to. After noting the arguments of the assessee, the CIT (A) in paragraph 6 of its order dated 22.11.2018, records its findings and decision. The CIT (A) agreed with the findings recorded by the assessing officer noting the rise and fall of the prices to be artificial and not commensurate with the normal market as Surabhi Chemicals had no business at all. The CIT (A) observes that whatever papers were submitted by the assessee in pursuance to notice issued cannot be construed as an evidence to establish the genuinity of the transaction, the transactions are unnatural, suspicious and the banking documents produced by the assessee are self-serving. Further CIT (A) holds that merely because a transaction was done through banking channel itself cannot validate the same and the burden of proof is on the assessee to prove genuinely of the claim. After referring to the decisions of the Hon’ble Supreme Court in ITAT NO. 06 OF 2022 AND ETC. BATCH Mohanakala, Durga Prasad More, Sumati Dayal and the decision of the Delhi High Court in Sajan Dass, CIT (A) holds that the documents relied on by the assessee should pass the test of normal behaviour of the assessee in the course of business, namely human conduct, preponderance of probability and surrounding circumstances and if they do not then the addition is justified. The CIT (A) referred to the decision in N.R. Portfolio to explain the role of the assessing officer, he being both an investigator and adjudicator. Further the CIT(A) holds that in Section 143 (3) the word used is “evidence” which will include circumstantial evidence also and in tax jurisprudence the word evidence has much wider connotation and further the word “material” used in Section 143(3) of the Act, showed that the assessing officer not being a court could rely upon material which might not be strictly admissible under the Indian Evidence Act and therefore the assessing officer is not fettered by the technical rules of evidence and would be entitled to act on the “material”. Further the CIT (A) holds that as per the principle laid down in Sumati Dayal the true nature of transaction can be ascertained from surrounding circumstances and proof beyond reasonable doubt has no applicability in determination of matters under taxing statute. Further the human probability has to be the guiding principle as held by the Hon’ble Supreme Court in Chuhar Mal Versus CIT 86. Further the CIT (A) holds that the payment through banks, transactions through stock exchange and other features are only apparent features and the real feature are the manipulated and abnormal price of off-loan and the sudden dip thereafter. Therefore, the CIT (A) holds that the transactions would fall (1988) 172 ITR 250 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH within the realm of suspicious and dubious transaction. The CIT (A) then proceeds to take note of the various other decisions of the co-ordinate bench of the Tribunal to highlight the importance of reports of the investigating agencies and would point out that it may be true that when transactions are through cheques it looks like real transactions but the authority is entitled to look behind the transactions and ascertain the motive behind the transactions. Thus, the CIT (A) concludes by holding that considering the facts of the assessee’s case and the preponderance of probabilities against the assessee, the entire capital gains demand has to be treated as fictitious and bogus more particularly when the assessee has not furnished cogent evidence to explain how the shares in an unknown company jumped up in no time and such fantastic sale price was not at all possible when there was no economic or financial basis to justify the price rise and therefore affirms the order passed by the assessing officer. Aggrieved by such order, the assessee was on appeal before the learned tribunal. As mentioned, the learned tribunal (SMC) took up for consideration 90 appeals together which includes the appeal filed by the assessee Smt. Swati Bajaj. The learned tribunal in paragraph 3 of the impugned order extracts the order passed by the CIT (A) in its entirety which runs to ten pages. The discussion is in paragraph 4 of the impugned order which is as follows:-

I have given any thoughtful consideration to rival contentions. Learned departmental representative vehemently supports both the lower authorities’ identical action holding the assesses STCL as bogus since derived from rigging of the scrip prices in issue and involving accommodation entry in collusion with the concerned ITAT NO. 06 OF 2022 AND ETC. BATCH entry operators. Hon’ble apex court’s decision in Sumati Dayal vs. CIT (1995) 80 Taxmann.89/214 ITR 801 (SC) and CIT Versus Durga Prasad More (1971) 82 ITR 540 (SC) are quoted before me during the course of hearing at the Revenue’s behest. It strongly argues that the department has disallowed/added the impugned STCL based on circumstantial evidence unearthed after a serious of search actions/investigations undertaken by the DDIT (Inv). I find no merit in Revenue’s instant arguments. The fact remains that the assessee has duly placed on record the relevant contract notes, share certificate(s), detailed corroborative documentary evidence indicating purchase/sale of shares through registered brokers by banking channel, demat statements etc. The Revenue’s only case as per its pleadings and both the lower authorities unanimously conclusion that there is very strong circumstantial evidence against the assessee suggesting bogus STCL accommodation entries. I find that there is a not even a single case which could pin-point any making against these assesses which could be taken as a revenue nexus. I make it clear that the CBDT’s circular dated 10.03.2003 has itself made it clear that mere search statements in the nature of admission in absence of supportive material do not carry weight. I notice that this tribunal’s coordinate bench’s decision in ITA No. 2474/Kol/2018 in Mahavir Jhanwar Vs. ITO decided on 01.02.2019 has taken into consideration identical facts and circumstances as well as latest developments on legal side whilst deleting the similar bogus LTCG addition.
38. The learned tribunal proceeds to extracts the decision of a coordinate Bench of the tribunal in Mahavir Jhanwar Versus Income Tax Officer in ITAT NO. 06 OF 2022 AND ETC. BATCH ITA No. 2474/Kol/2018 dated 01.02.2019 and the conclusion of the tribunal in paragraph 5 and 6 are as follows:-

5. Coupled with this, hon’ble jurisdictional high court’s other decision in CIT Vs. Rungta Properties Pvt. Ltd. ITA NO. 105 of 2016, CIT Vs. Shreyahi Ganguli ITA No. 196 of 2012, M/s. Classic Growers Ltd. Vs. CIT ITA No. 129 of 2012 also hold such transactions in scrips supported by the corresponding relevant evidence to be genuinene. I adopt the above extracted reasoning mutatis mutandis therefore to delete the impugned STCL disallowance/addition of Rs. 28,23,500/-. Unexplained commission expenditure disallowance, if any shall automatically follow suit as a necessary corollary. No other argument or ground has been agitated before me during the course of hearing. This “lead” case ITA No. 2623/Kol/2018 is allowed in above terms [Same order to follow in all the remaining eighty nine appeal(s)] in absence of any distinction being pointed out at Revenue’s behest.
6. All these assesses” ninety appeals are allowed in above terms, A copy of the instant common order be placed in the respective case file(s).
Order pronounced in open court on 26/06/2019
39. The correctness of the above decision is called in question in these appeals. As noted by us the tribunal has not ventured to examine the factual position of 89 other cases which were also allowed by the tribunal by the common order. It is the submission for the learned standing counsel for the department that the facts which are necessary to take a decision in the assessees case has been elaborately dealt with by the CIT (A) which was ITAT NO. 06 OF 2022 AND ETC. BATCH completely ignored by the learned Tribunal and the learned tribunal held that the assessee had placed on record contract notes, share certificates, shown to have traded through registered brokers, payment effected through banking channels and D-Mat statements and that the revenue’s only the case is that there is a very strong circumstantial evidence against the assessee and there is not a single case which could pin-point against the assessee and therefore was of the view that the decision in Mahavir Jhanwar could be applied to the assessees case as well. We note that in the decision in Mahavir Jhanwar four decisions of the High Court have been referred to, two of which are of this Court namely Carbo Industrial Holdings Limited and Emarald Commercial Limited, the other two decisions are of the Bombay High Court in Shri Mukesh Ratilal Marolia and that of the Punjab and Haryana High Court in Prempal Garg. Thus, the predominant issue which falls for consideration is to ascertain whether the claim of LTCG would be considered as genuine. The assessee pleads absolute innocence, a regular trader in shares and stocks, payments effected and received through banking channels, her stock broker is a reputed person, the financial advisor is a reputed organization, the regulatory authorities namely SEBI or The Stock Exchange have not taken any action against the trading of the shares of the said company, the materials which appear to be the basis for the assessment were not furnished to the assessee, the person who is stated to have given statements were no made available for cross examination in spite of specific request and therefore, the theory of circumstantial evidence or the theory of human probabilities cannot be applied to the assessees case.
ITAT NO. 06 OF 2022 AND ETC. BATCH

40. Before we examine the contentions, we are tempted to point out that the exercise done by the tribunal was a bit perfunctory. There is absolutely no discussion of the factual position in any of the 89 appeals, the exception is in paragraph 4 with regard to the certain facts of the assessees case (Swati Bajaj). We are not very appreciative of the manner in which the bunch of appeals have been disposed of. The cardinal principles which courts and tribunal have followed consistently is that each assessment year is an individual unit and unless and until it is shown that there are distinguishing feature in a particular assessment year, the decision taken for the earlier years are to be followed to ensure consistency. While doing so the Courts/ Tribunals are required to examine the facts and render a finding as to why the decision in the earlier assessment years should be adopted or not.

41. Be that as it may, the appeals having travelled thus far and elaborates submissions having been made before us, we shall deal with the issues and proceed to render a decision.

42. We have heard, Mr. Vipul Kundalia, Learned Senior Standing Counsels assisted by Mr. Samarjit Roychowdhury, Mr. Aryak Dutta Mr. Tilak Mitra, Mr. Om Narayan Rai, Mr. Prithu Dhudhoria. Mr. Amit Sharma and Mr. Soumen Bhattacharya for the appellants/revenue, and Mr. S.M. Surana, Senior Advocate, assisted by Mr. Sourav Bagaria, Mr. Avra Mazumdar, Mr. Subash Agarwal, Mr. Soumya Kejriwal, Mr. Pratyush Jhunjhunwala, Mr. Varun Kedia, Mr. Brijesh Kumar Singh, Mr. G.S. Gupta, Mr. Bhaskar Sen Gupta, Mr. Binayak Gupta, Sk. Md. Bilwal Hossain, Mr. K. Roy, and Mr. Arif Ali for the respondent/assessee.

ITAT NO. 06 OF 2022 AND ETC. BATCH

43. From the assessment order passed in the case of the assessee Smt. Swati Bajaj, we find that the genesis of the issue commenced from an investigation report submitted by the Directorate of Income Tax, Investigation, Kolkata (DIT). The investigation report has been prepared by the Deputy Director of Income Tax, Investigation Unit -II and III, Kolkata. Before we examine the report, we shall deal with the objection raised by Mr. Surana, learned senior advocate as regards the effect of such report, whether at all it is a “report” and can the assessing officer or the CIT (A) can proceed on the basis of such “report”. The above submission is sought to be buttressed by placing reliance on the decision in Sesa Sterlite and Odeon Builders.

44. In Sesa Sterilite, all the assessees were traders and exporters of iron ore and some of them were also miners and processors of the ore. Allegations of large-scale illegal mining and trading necessitated the Government of India to appoint a Commission of Inquiry under Section 3 of the Commission of Inquiry Act, 1952. The Commission so appointed by the Union of India submitted three reports wherein finding was rendered with regard to the violation of various statutes and other infirmities and that there were illegal exports particularly by means of under-invoicing on the part of the mining lessees and exporters. In the said case this report was the basis for the Income Tax Officer to issue notice under Section 148 of the Act proposing to re-open the assessments under Section 147 of the Act for the assessment year 2008-2009.The reason for re-opening were:

(a) Under-invoicing of exports by the assessee, (b) Illegal mining activity and income arising from it to be assessed as income ITAT NO. 06 OF 2022 AND ETC. BATCH from other sources and (c) Escapement of income from assessment on account of failure on the part of the assessee to disclose wholly and truly part all material fact necessary for the assessment.
45. In support of the first reason, the third report of the Commission of Inquiry was relied on. The assessee challenged the re-opening as being bad in law as it was solely on the basis of the report of the Commission of Inquiry and such report itself was vitiated on account of serious violation of principles of natural justice by reason of breach of Section 8B and 8C of the Commission of Inquiry Act. That the lessees including the assessee therein were not given any opportunity to explain the material used by the Commission of Inquiry in its report. Further it was contended that the report of the Commission is in the nature of expression of an opinion by the Commission and has no efficacy either as a legal findings or admissible evidence. The Division Bench of the Bombay High Court while testing the correctness of the said submissions observed that in so far as the allegations of under-invoicing by the exporters is concerned, it is nothing but a matter of expression of opinion by the Commission of Inquiry. Further the Court noted that the report of the Commission of Inquiry was a subject matter of challenge in a writ petition by the mining lessees and exporters including the assessee Sesa Sterlite. The Court further held that the report of the Commission neither constitutes a binding judgment nor a definitive pronouncement. Further by referring to the decision of the Hon’ble Supreme ITAT NO. 06 OF 2022 AND ETC. BATCH Court in State of Karnataka Versus Union of India 87, it was held that the report submitted by the Commission of Inquiry may or may not be accepted by the authority appointing the Commission of Inquiry. In the background of these findings, the Court held that the re-opening of the assessment could not have been done exclusively based on the report of the Commission of Inquiry.

46. Mr. Surana, learned senior counsel relied on the decision of the Allahabad High Court in Smt. Kavita Gupta and submitted that the report of the Deputy Director of Income Tax, Investigation (DDIT) cannot be the basis of the assessment more so when the report was not furnished to the assessee, there is no finding as against the asessee in the report which was produced for the first time before this Court during the course of the arguments of these appeals. It is submitted in Smt. Kavita Gupta, it was held that a mere report of the DDIT suggesting that some of the gifts received by the assessee therein may be non-genuine and that to when not confronted to the assessee was not sufficient to conclude that the gifts obtained by the assessee were not genuine. It was further argued that the report of the DDIT is a third-party information which has not been independently subjected to further verification by the assessing officer who has not provided the copy of the statements to the appellants. Thus, the appellant thereby denying opportunity of cross examination to the assessee therein who had in the said case discharged the initial burden of substantiating the purchases through various documents is in violation of (1977) 4 SCC 608 ITAT NO. 06 OF 2022 AND ETC. BATCH principle of natural justice. In support of such contention, reliance was placed on the decision of the Hon’ble Supreme Court in Odeon Builders.

47. We are required to test the correctness of the objection raised by Mr. Surana the learned senior counsel with the aid of the aforementioned three decisions. The decision in Sesa Sterilite as noted, arises out of a report submitted by the Commission of Inquiry constituted by the Union of India to enquire into the allegations of illegal mining and trading of ore in various states including the state of Goa. The court after noting the provisions of the Commission of Inquiry Act more particularly as to the effect of such report on the authority appointing the Commission of Inquiry and also on the ground that the report was vitiated on account of breach of Sections 8B and 8C of the Commission of Inquiry Act, has rendered a finding in favour of the assessee therein. That apart, the Court also found that the very report of the Commission of Inquiry was subject matter of challenge in a writ petition before the Bombay High Court by the mining lessees and exporters. Therefore, the Court taking note of the facts and also the decision in State of Karnataka which has held that the report of the Commission of Inquiry may or may not be binding on the authority appointing the Commission, held that the re-opening of the assessments under Section 147 of the Act could not have been solely based upon such report. Firstly, we need to note that the report of the DDIT is by an authority of the investigation wing of the Income Tax department. Therefore, at the threshold it cannot be treated to be a third-party report. That apart the effect of a report submitted in terms of the provisions of the Commission of Inquiry Act is quite different and distinct from a report submitted in-house by the Income Tax department.
ITAT NO. 06 OF 2022 AND ETC. BATCH Therefore, in our view the decision in Sesa Sterlite is distinguishable. In so far as the decision in Kavita Gupta the challenge was whether the assumption of jurisdiction by the Commissioner of Income Tax under Section 263 of the Act was justified in the eye of law. In the said case, the Court noted the legal position that when an inquiry is launched under Section 143(3) of the Act, the findings will not depend only upon the presumption, the onus of proof could not be cast entirely upon the revenue and such onus would shift on the revenue only if the assessee produced some material to show that what she states may be correct. On facts the Court, in the said case, found that the onus had shifted to the revenue as the assessment was completed by the assessing officer after inquiry and in such factual position, the Court held that a mere report of the Deputy Director (Intelligence) suggesting that some of the gifts obtained by the assessee therein were not genuine and such report having been not confronted to the asessee therein was not sufficient to conclude the gifts were not genuine. The said decision is distinguishable for several reasons. Firstly, the Court considered as to whether the assumption of jurisdiction under Section 263 of the Act by the CIT (A) was justified and on facts the Court was satisfied that when the scrutiny assessment was completed under Section 143(3) the assessing officer had conducted a proper inquiry. Therefore, the Court found that there was no cause for invoking power under Section 263 of the Act by merely relying upon the report of the Deputy Director (Investigation) which was not furnished to the assessee therein. These distinguishing factors will clearly show that the decision is inapplicable to the facts and circumstances of the cases on hand. In Odeon ITAT NO. 06 OF 2022 AND ETC. BATCH Builders the appeal filed by the revenue was dismissed by the Hon’ble Supreme Court as no substantial questions of law arise from the order passed by the tribunal. The CIT (A) and the learned Tribunal concurrently held in favour of the assessee therein on facts holding that the information gathered by the investigation wing of the department which was not independently subjected to further verification could not have been relied upon by the assessing officer more particularly that the department did not furnish the report to the assessee therein and the Hon’ble Supreme Court was satisfied that the assessee therein had prima facie discharged the initial burden of substantiating the purchases through various documents. In our humble view the decision is wholly distinguishable on facts.

48. In the background of the aforementioned discussions, we have no hesitation to hold that the plea raised on behalf of the assesses that the report should be discarded cannot be accepted. The report has to be read as a whole along with the annexures/chapters. We shall go into the finer details of the report, the effect of such report in the later part of this judgment.

49. An investigation is commenced when allegations crops up regarding tax evasion. The Income Tax department was nowhere in the picture when the assessees effected purchase of the shares and subsequently sold the shares well after the period of 12 months. It is only when the assessees, substantially in large numbers, made fanciful claims of LTCG, time had come to examine its genuinity of such claims. While on this issue, it would be relevant to take note of the decision of the Hon’ble Supreme Court in Ram Jethmalani and Others. The matter before the Hon’ble Supreme ITAT NO. 06 OF 2022 AND ETC. BATCH Court was in respect to transfer of monies and accumulation of monies which were unaccounted for by many individuals and legal entities in the country in foreign banks. The degree of control on such transactions by the states was explained by the Hon’ble Supreme Court in the following terms:

If the State is soft to a large extent, especially in terms of the unholy nexus between the law makers, the law keepers, and the law breakers, the moral authority, and also the moral incentives, to exercise suitable control over the economy and the society would vanish. Large unaccounted for monies are generally an indication of that.
These matters before us relate to issues of large sums of unaccounted for monies, allegedly held by certain named individuals, and loose associations of them; consequently we have to express our serious concerns from a constitutional perspective. The amount of unaccounted for monies, as alleged by the Government of India itself is massive. The show-cause notices were issued a substantial length of time ago. The named individuals were very much present in the country. Yet, for unknown, and possible unknowable, though easily surmisable, reasons the investigations into the matter proceeded at a laggardly pace. Even the named individuals had not yet been questioned with any degree of seriousness. These are serious lapses, especially when viewed from the perspective of larger issues of security, both internal and external, of the country.
50. The Hon’ble Supreme Court proceeded to frame two issues the first of which was the appointment of a Special Investigation Team (SIT) and the ITAT NO. 06 OF 2022 AND ETC. BATCH justification for appointing a Special Investigation Team was made by the Hon’ble Supreme Court in the following terms:

In the light of the fact that the issues are complex, requiring expertise and knowledge of different departments, and the necessity of coordination of efforts across various agencies and departments, it was submitted to us that the Union of India has recently formed a High Level Committee, under the aegis of the Department of Revenue in the Ministry of Finance, which is the nodal agency responsible for all economic offences. The composition of the High Level Committee (HCL) is said to be as follows: (i) Secretary, Department of Revenue as the Chairman; (ii) Deputy Governor Reserve Bank of India; (iii) Director (IB); (iv) Director, Enforcement; (v) Director, CBI; (vi) Chairman, CBDT;
(vii) DG, Narcotics Control Bureau; (viii) DG, Revenue Intelligence; (ix) Director, Financial Intelligence Unit; and (x) JS (FT & TR-I), CBDT. It was also submitted that the HLC may co-opt, as necessary, representation not below the rank of Joint Secretary from the Home Secretary, Foreign Secretary, Defence Secretary and the Secretary, Cabinet Secretariat. The Union of India claims that such a multi- disciplinary group and committee would now enable the conducting of an efficient and a systematic investigation into the matters concerning allegations against Hassan Ali Khan and the Tapurias; and further that such a committee would also enable the taking of appropriate steps to bring back the monies stashed in foreign banks, for which purposes a need may arise to register further cases. The Union of India also claims that the formation of such a committee indicates the seriousness with which it is viewing the entire matter.
ITAT NO. 06 OF 2022 AND ETC. BATCH
51. The above decision would render support to cause an investigation by the Income Tax department when matters come to their notice showing abnormally high and inflated claims of LTCG especially when the share market in the country during the relevant time was not progressive. Therefore, no fault can be attributed to the Income Tax department for causing an investigation and any finding rendered pursuant to such investigation could very well be a material to commence further proceedings under the Act against the assessees who fall within the ring of suspicion. Mr. Surana, learned Senior Counsel would contend that unlike in the cases relied upon by him, there is nothing to show that the Government of India or the CBDT had directed conduct of an investigation by the DDIT who is the lowest in the rung of officers in the investigation wing of the Income Tax department. To examine, this we had perused the preamble portion of the report. The report has been prepared by the DDIT and it has been forwarded to the DGIT (Investigation) in all the states in the country as well as the Director General of International Tax, Mumbai. The report prepared by the DDIT is on behalf of the Directorate of Investigation, Kolkata, and this is evident from the report dated 27.04.2015. Therefore, to discredit the report as if to be initiated by the DDIT on his own accord is in an incorrect submission. The learned senior counsel referred to the penultimate paragraph of the report and submitted that the officer who prepared the report himself mentions it to be a “write” up and therefore it is not a “report” in the strict sense. We are unable to agree with the said submission as substance over form has to be looked into and preferred. Therefore, to pick up the words “write up” and to brand the report to be a personal opinion of ITAT NO. 06 OF 2022 AND ETC. BATCH the DDIT is not tenable. Therefore, on the grounds raised by the learned senior counsel, we are not persuaded to hold that the report has to be discarded in its entirety and accordingly this objection raised on behalf of the assessee is decided against them.

52. Having steered clear of the objection raised regarding the report, we shall briefly deal with the contents of the report which states that the DIT, Kolkata had under taken the accommodation entries LTCG investigation on a much larger scale than earlier as a result they were able to identify a very large number of beneficiaries who have together taken a huge amount of bogus entries of LTCG and 64,811 beneficiaries were identified to be involved in the bogus claims of LTCG which was estimated above Rs. 38,000 crores. It is stated that in order to cast the net wide the department adopted a different approach of investigation which acquired a character of a project. The report states that illegal business of bogus LTCG involves three different individuals, the promoter of “penny stocks” companies also known as syndicate member, the share brokers and the entries operators who purchases the shares through paper companies by taking cash and many at times the three categories of individuals perform overlapping roles and at times, a single individual may perform all the three functions. The report further states in the investigations done earlier with regard to the bogus LTCG, the approach was to target the individuals and through him identify the penny stock and beneficiary and this method had yielded results on a limited scale emanating only from individual/individuals targeted. Therefore, keeping in mind, the rampant nature and exponential growth of the illegal business in the recent times and to cast the net wide the ITAT NO. 06 OF 2022 AND ETC. BATCH department reversed the methodology of investigation. In that process, it is stated, that they first identified the “penny stocks” and then started targeting the individuals who dealt in them. The report states that by adopting such method they were able to virtually cover almost all Kolkata based operators in one investigation. Further the report states that it is an on-going process which acquires the character of a project that will continue for quite some time unlike usual investigation which aims at the individual involved. The report has identified 84 penny stocks listed with the BSE which have been used for generating bogus LTCG which includes 18 scripts on which the DIT (Investigation-I) Delhi had conducted investigation and the results were circulated. The report mentions 22 entities who are brokers who were covered in the investigation involved in the purchase/sale and price rigging of the penny stocks of the 84 companies. The report states that it is pertinent to note that the list includes some of the big names like Anand Ratithi, Religare and SMC. The report further states that the figure of the total transaction of the brokers is only above Rs. 15,970 crores as against the total trade in the script which is more than Rs. 38,000 crores. The reason being that there are other brokers from other cities including some leading names who have traded in these scripts but they could not be covered in the investigation. Further the report states that the department was able to establish full cash trail starting from cash deposit account to the accounts of the beneficiary for nearly a sum of more than Rs. 1575 crores and the broker wise split up was provided in a tabular form. The report explains the modus operandi in the following terms:-
ITAT NO. 06 OF 2022 AND ETC. BATCH Modus Operandi The whole business of providing entries of bogus LTCG over the years have become much more organised and with economy of scale in full operation the stake involved have become huge. Before the actual transaction start taking place there are brokers in different towns who contact prospective clients and take paper booking for entries. The Commission to be paid to the operators is decided at this stage however, no money is paid. Once the booking is complete the operators have a reasonably good idea of how much LTCG is to be provided along with the break-up of individual beneficiaries. This data is essential to decide which penny stock or companies to use for the job and which beneficiary to buy how many shares.
53. Thereafter the report speaks of the types of penny stock companies, the entities involved in the transaction, the transaction which involves three legs, the merger method, and a pictorial representation as to how the share prices raised to astronomical level and thereafter there is a downward trend which according to the department is used by the operators for booking bogus LTCL. The report further states that list of beneficiaries DGIT (INB) wise along with the statements have been forwarded for dissemination to the assessing officers through the Chief Commissioner of Income Tax concerned. The information was provided in a soft form recorded in a DVD. There were five folders namely:- (i) Investment report, (ii) LTCG data base, (iii) LTCG summary, (iv) LTCG trade ledger, (v) STCL summary, (vi) STCL trade ledger and (vii) SEBI orders

54. Further the report states that the data of DGIT(International Tax) shows that large number of NRIs and well-known FIIs are buying and selling ITAT NO. 06 OF 2022 AND ETC. BATCH these penny stocks and this appears to be a case where the black money stashed a broad is coming back to India (purchase) or money being sent out of the country (sale). The report points out that while only Rs. 27.57 crores have been gone out of the country, an amount of above Rs. 114.97 crores has come in. The report has been signed by the Principal Director of Income Tax (Investigation), Kolkata. The report has been communicated to the DGIT (Investigation) of all the states. Thus, we find that the methodology of the investigation by the department is quite different from the normal method of investigation which commences from the investor or the assessee as the case may be. The report states that on account of huge sums of money being claimed as LTCG/LTCL, a different approach/methodology was adopted by the department, by commencing the investigation not from the individuals who traded with the penny stocks but investigation has started targeting the individuals who dealt with those penny stocks. This concept can be mentioned to be one of “working backwards”. This is one of the modes of causing an investigation, considering its magnitude. The approach of the department cannot therefore be faulted. Therefore, a different approach is required to be taken on the effect and efficacy of the report according to the department is in the nature of a project. The Court sit in judgment over the methodology adopted by the department as no taxpayer is entitled to any benefit which shall not accrue to him under the provisions of the Act. If any dubious methodology has been adopted for the purpose of availing certain benefits not admissible under law, the same will not come within the ambit of tax planning but shall be a case of tax avoidance by adopting illegal methods. Therefore, we are of the view that the department was justified in ITAT NO. 06 OF 2022 AND ETC. BATCH proceeding to take up the cases, not only within the jurisdiction of the state of West Bengal but other states as well. Thus, the moot question would be if the report is the starting point for considering as to how the claim of LTCG/LTCL by the respective assessees were genuine, we should consider as to whether the assessing officers have committed any error of law, error of jurisdiction or error on facts, leading to the assessments being held to be not sustainable.

55. The first argument on behalf of the assessee is that the copy of the investigation report was not furnished to them despite specific written request made on behalf of the assesses to furnish the copy of the report, the statements recorded and provide those persons from whom statements were recorded to be cross examined on behalf of the assessee. There is no dispute to the fact that the copy of the statement said to have been recorded during the course of investigation has not been furnished to the assessees and the request made by some of them for cross examining of those persons was not considered. The question would be as to whether the non-compliance of the above would render the assessments bad in law. The argument of the revenue is that the assessments cannot be held to be illegal merely on the grounds that the copy of the report was not furnished as the respective assessing officers have clearly mentioned as to the nature of investigation done by the department and as the report itself states that the investigation commenced not from the assessees end but the individuals who dealt with these penny stocks who were targeted. It is equally true invariably in all cases, the statement of the stock brokers, the entry operators or the Directors of the various penny stock companies does not directly implicate ITAT NO. 06 OF 2022 AND ETC. BATCH the assessee. If such being the situation, the assessee cannot be heard to say that the copy of the entire report should have been furnished to him, the person from whom the statements were recorded should have been produced for cross examination as admittedly there is nothing to implicate the assessee Smt. Swati Bajaj of insider trading or rigging of share prices. But the allegation against the assessee is that the claim for LTCG/LTCL is bogus. As pointed out by Mr. Rai, learned senior standing counsel, the investigation report is general in nature not assessee specific. Therefore, we are required to see as to whether non-furnishing of the report which according to the revenue is available in the public domain would vitiate the proceedings on the ground that the assessee was put to prejudice.

56. In State Bank of Patiala and Others Versus S.K. Sharma, the Hon’ble Supreme Court pointed out that violation of any and every procedural provision cannot be said to automatically vitiate the domestic enquiry held against the delinquent employee or the order passed by the disciplinary authority except in cases falling under no notice, no opportunity and no hearing categories. Further it was held that if no prejudice is established to have resulted from such violation of procedural provisions no interference is called for, against the ultimate orders. The test laid down was whether the person has received a fair hearing considering all things as the ultimate test is always the test of prejudice or the test of fair hearing as. Further the Hon’ble Supreme Court pointed out a distinction between a case of no opportunity and a case of no adequate opportunity and while examining the latter case, it was held that the violation has to be examined from the stand point of prejudice, in other words the Court or the tribunal ITAT NO. 06 OF 2022 AND ETC. BATCH has to see whether in the totality of the circumstances, the delinquent officer/employee did or did not have a fair hearing and the orders to be made shall depend upon the answers to the said query. Further it was held that there may be a situation where interest of the state or public interest may call for curtailing of rule of audi alteram partem and in such a situation the Court may have to balance public/state interest with the requirements of natural justice and arrive at an appropriate decision.

57. In a very recent decision of the Hon’ble Supreme Court in M.J. James after referring to a catena of decisions on the point the Hon’ble Supreme Court pointed out that natural justice is a flexible tool in the hands of the judiciary to reach out in fit cases to remedy injustice. The breach of the audi alteram partem rule cannot by itself, without more lead to the conclusion that prejudice is thereby caused. Where procedural and /or substantive provisions of law embodied the principles of natural justice, their infraction per-se does not lead to invalidity of the order passed. The prejudice must be caused to the litigant, except in the case of a mandatory provision of law which is conceived not only in individual interest but also in public interest. Further by referring to the decision in State of Uttar Pradesh Versus Sudhir Kumar Singh 88, it was held that the “prejudice” exception must be more than a mere apprehension or even a reasonable suspicion of a litigant, it should exist as a matter of fact or to be cast upon a definite inference of likelihood of prejudice flowing from the non-observance of natural justice.

(2020) SCC Online SC 847 ITAT NO. 06 OF 2022 AND ETC. BATCH

58. Therefore, the assessees have to specifically point out as to how they were prejudiced on account of non-furnishing of the investigation report in its entirety, failure to produce the persons from whom the statements were recorded for being cross examined would cause prejudice to the assessee as nowhere in the report the names of the assessees feature. The investigation report states that the investigation has not commenced from the individuals but it has commenced who had dealt with the penny stocks, concept of working backwards. This is a very significant factor to be remembered. Therefore, there has been absolute anonymity of the assessee in the process of investigation. The endeavour of the department is to examine the “modus operandi” adopted and in that process now seek to identify the assessees who have benefited on account of such “modus operandi”. Therefore, considering the factual scenario no prejudice has been established to the assessee by not furnishing the investigation report in its entirety nor making the persons available for cross examination as admitted by the department in substantial number of cases the assessees have not been specifically indicted by those persons from whom statements have been recorded.

59. We are conscious of the fact that there may be exceptions however nothing has been brought before us to show that there was an exception in any of these appeals heard by us. In a few cases the assessee has been made known of the statement of the Director of the penny stock company or the stock broker, entry operator despite which those assessees could not make any headway. While on this issue, we need to consider as to whether and under what circumstances the right of cross examination can be demanded as a vested right. In Kishanlal Agarwalla, the Hon’ble Division ITAT NO. 06 OF 2022 AND ETC. BATCH Bench of this Court pointed out that no natural justice requires that there should be a kind of formal cross examination as it is a procedural justice, governed by the rules and regulations. Further it was held that so long as the party charged has a fair and reasonable opportunity would receive, comment and criticize the evidence, statements or records on which the charges is being against him, the demand and tests of natural justice are satisfied.

60. In Bakshi Ghulam Mohammad 89 the Hon’ble Supreme Court held that the right of hearing cannot include the right of cross examination and the right must depend upon the circumstances of each case and must also depend on the statute under which the allegations are being enquired into.

61. Having noted the above legal position, it goes without saying there is no vested right for the assessee to cross examine the persons who have not deposed anything against the assessee. The investigation report proceeds on a different perspective commencing from a different point and this has led to the enquiry being conducted by the assessing officer calling upon the assessee to prove the genuineness of the claim of LTCG.

62. In the light of the above conclusion we hold that the decision in Gorkha Security Services does not lend any support to the case of the assessees and is distinguishable.

63. The copy of the recommendations of SIT on black money as contained in the third SIT report as published by the Press Information Bureau, Government of India, Ministry of Finance, dated 24.07.2015 was placed AIR (1967) SC 122 ITAT NO. 06 OF 2022 AND ETC. BATCH before us with reference to the misuse of exemption on LTCG for money laundering and the recommendations are as hereunder:

A company with very poor financial fundaments in terms of past income or terms of past income or turnover is able t raise huge capital allotment of Preferential allotment of shares is made to various entities.
There is a shop rise in price of scrip once the preferential allotment is done. This is normally achieved through circuading shares of shares among a select group of companies. These groups of companies often have common promoters/directors. The scrips with thus artificially inflated price rise are offloaded through companies whose funding is provided by the same set people who want to convert black money into while.
There is an urgent need for having an effective preventive and punitive action is such matters to prevent recurrence of such instances.
We recommend the following measures in this regard:
SEBI needs to have an effective monitoring mechanism to study unusual rise of stocks prices of Companies while such a rise is taking place. We understand that SEBI has a strong IT infrastructure which can generate red flag for such instances. Such red flags could be built upon trading volumes, entities which contribute to trading volume financial background of firms through their annual returns and any other indicators SEBI may develop. We believe that with effective and timely monitoring by SEBI a significant number of such instances can be checked in time. Once such instances are detected, SEBI should invariably share this information with CBDT and FIU.
ITAT NO. 06 OF 2022 AND ETC. BATCH Barring such entities from securities market would not be of strong deterrence in itself. In case it is established, the stock platforms have been misused for taking LTCG benefits, prosecution should invariably be launched and relevant sections of SEBI Act. Section 12A read with section 24 of the Securities Exchange Board of India Act 1992 are predicate offences.
Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences.
64. From the above it is seen that there is a discussion about the “modus operandi” adopted and the SIT opines that there is an urgent need for having an effective, preventive and punitive action in such matters to prevent recurrence of such instances. This is a relevant aspect to be borne in mind.

65. Thus, the report submitted by the investigation department cannot be thrown out on the grounds urged on behalf of the assessees. The assesses have not been shown to be prejudiced on account of non- furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced, coupled with the fact as admitted by the revenue, the statements do not indict the assessee. That apart, we have noted that the investigation has commenced targeting the individuals who dealt with the penny stocks and after examining the modus seeing the cash trail the report has been submitted recommending the same to be placed before the DGIT (investigation) of all the states of the country. It is thereafter the concerned ITAT NO. 06 OF 2022 AND ETC. BATCH assessing officers have been informed to consider as to the bonafideness and genuineness of the claims of LTCG/LTCL of the respective assessees qua the findings which emanated during the investigation conducted on the individuals who dealt with the penny stocks. Therefore, the assessments have commenced by the assessing officers calling upon the assessee to explain the genuineness of the claim of LTCG/ LTCL made by them. In all the assessment orders, substantial portion of the investigation report has been noted in full. A careful reading of the some would show that the assessee has not been named in the report. If such be the case, unless and until the assessee shows and proves that she/he was prejudiced on account of such report / statement mere mentioning that non-furnishing of the report or non-availability of the person for cross examination cannot vitiate the proceedings. The assessees have miserably failed to prove the test of prejudice or that the test of fair hearing has not been satisfied in their individual cases. In all the cases, the assessees have been issued notices under Sections 143(2) and 142(1) of the Act they have been directed to furnish the documents, the assessee have complied with the directions, appeared before the assessing officer and in many cases represented by Advocates/Chartered Accountants, elaborate legal submissions have been made both oral and in writing and thereafter the assessments have been completed. Nothing prevented the assessee from mentioning that unless and until the report is furnished and the statements are provided, they would not in a position to take part in the inquiry which is being conducted by the assessing officer in scrutiny assessment under Section 143(3) of the Act. The assessee were conscious of the fact that they have not been named in the ITAT NO. 06 OF 2022 AND ETC. BATCH report, therefore made a vague and bold statement that the non-furnishing of report would vitiate the proceedings. Therefore, merely by mentioning that statements have not been furnished can in no manner advance the case of the assessee. If the report was available in the public domain as has been downloaded and produced before us by the learned standing counsel for the revenue, nothing prevented the assesses who are ably defended by Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defence. Therefore, the based on such general statements of violation of principles of natural justice the assessees have not made out any case.

66. While on this issue, it is important to take note of the decision in T. Takano. In the said case, the SEBI took a stand that the investigation report under Regulation 9 of the SEBI Regulations could also include sensitive information about the business affairs of various entities and persons concerned and if disclosed it would affect their privacy and the competitive position of other entities. While considering the correctness of the submissions made on behalf of the SEBI, the Hon’ble Supreme Court held that if the disclosure of the report would affect third party rights the onus then shifts to the appellant to prove that the information is necessary to defend the case appropriately. On facts it was found that the appellant therein did not sufficiently discharge his burden by proving that the non- disclosure of the information would affect his ability to defend himself.

67. In the cases on hand, undoubtedly the report contains information about various penny stocks companies about the directors of the companies and also the stock brokers, entry operators and others who have been ITAT NO. 06 OF 2022 AND ETC. BATCH named in the report. It is an admitted case that the names of the assessees do not figure in the report. Therefore, non-furnishing of the report has in no manner prejudiced the rights of the assessees to discharge the onus cast upon them in terms of Section 68 of the Act.

68. It is equally not in dispute that whatever information which was required to be made known to the assessee has been informed to the assessee by the assessing officer by issuance of a notice to each of the assesses to which they have responded by submitting their replies. Therefore, in the absence of any prejudice caused to the assessee on account of non-furnishing of the entire report, the assessees cannot be a heard to say that there has been violation of principles of natural justice and their right to defend themselves was in any manner affected. At this juncture, it would be of much relevance to refer to the decision in K. R. Ajmera. The question of law which arose for consideration before the Hon’ble Supreme Court was as to what is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practices under the SEBI Regulations and for violating the code of conduct of the SEBI (Stocks brokers and Sub-brokers) Regulations. It was pointed out that the code of conduct for stock brokers lays down that they shall maintain high standard of integrity, promptitude and fairness in the conduct of all investment business and shall act with due skill and care and diligence in the conduct of all investment business. The Code also enumerates different shades of duties of stock brokers towards the investor and those duties pertain to high standard of integrity that the stock broker is required to maintain in the conduct of his business. It was further pointed out that it is ITAT NO. 06 OF 2022 AND ETC. BATCH a fundamental principle of law that prove of an allegation levelled against a person may be in the form of direct substantive evidence or as in many cases such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/ charges made and levelled. It was further held that direct evidence is a more certain basis to come to a conclusion yet in the absence thereof the courts cannot be helpless. It was further pointed out that it is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion. The above tests laid down by the Hon’ble Supreme Court were applied to the facts of the case in K.R. Ajmera and it was noted that the scrips in which trading had been done wherefore illiquid scrips meaning thereby that such scrips though listed in the BSE were not a matter of every day buy and sell transactions. Further it was held that trading in such illiquid scrips is not impermissible yet voluminous trading over a period of time in such scrips is a fact that should attract the attention of a vigilant trader engaged in such trades. It was further pointed out that though proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume and trading can reasonable point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the brokers / sub-broker and may be between the ITAT NO. 06 OF 2022 AND ETC. BATCH brokers/sub-broker and the client or it could be between two brokers/sub- brokers engaged in the buy and sell transactions. Further it was pointed out that when over a period of time such transactions have been made between the same set of brokers or a group of brokers a conclusion can be a reasonable reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trade the consequences of which is large volumes of fictitious trading resulting in unnatural rise in hiking the price/value of the scrips. In the said case, it was argued that on a screen- based trading the identity of the second party to be a client or the broker is not known to the first party/client or broker. This argument was rejected as being irrelevant. It was pointed out that the screen-based identity system keeps the identity of the parties anonymous and it will be too naïve to rests the final conclusions on said basis which overlooks a meeting of minds elsewhere. Further it was held that direct proof of such meeting of mind elsewhere would rarely be forth coming and therefore the test is one of the preponderance of probabilities so far as the adjudication of a civil liability arising out of violation of the Act or to the Regulations. Further it was held that the conclusion has to be gathered from various circumstances like that volume of trade effected; the period of persistence in trading in particular scrips; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors.

69. Thus, the legal principle which can be culled out from the above decision is that to prove the allegations, against the assessee, can be inferred by a logical process of reasoning from the totality of the attending facts and ITAT NO. 06 OF 2022 AND ETC. BATCH circumstances surrounding the allegations/charges made and levelled and when direct evidence is not available, it is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor especially when the income tax department has been able to point out that there has been a unnatural rise in the price of the scrips of very little known companies. Furthermore, in all the cases, there were minimum of two brokers who have been involved in the transaction. It would be very difficult to gather direct proof of the meeting of minds of those brokers or sub-brokers or middlemen or entry operators and therefore, the test to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income Tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders and the volume thereof and proximity of time between the two which are relevant factors. Therefore, in our considered view the methodology adopted by the department cannot be faulted.

70. It was argued by Mr. Bagaria that in the decision in Balram Garg, the decision in K.R. Ajmera has been overruled. To examine the correctness of the said submission, we have carefully gone through the findings rendered by the Hon’ble Supreme Court in paragraph 47 of the judgment in Balram Garg which reads as follows:

ITAT NO. 06 OF 2022 AND ETC. BATCH Lastly, we have given our anxious consideration to the judgments relied upon by the learned counsel of the Respondent viz. SEBI vs. Kishore R. Ajmera [(2016) 6 SCC 368] and Dushyant N. Dalal vs. SEBI [(2017) 9 SCC 660]. Suffice it to hold that these cases are distinguishable on the facts of the present case, as the former is not a case of insider trading but that of Fradulent/Manipualtive Trade Practices; and the latter case relates to Interest Penalty rather than the subject matter at hand. Reliance placed on the case of Kishore R. Ajmera (supra) to show that presumption can be drawn on the basis of immediate and relevant facts is contrary to law already settled by this Court in the case of Chintalapati Srinivasa Raju (supra) where it is held that “a reasonable expectation to be in the know of things can only be based on reasonable inference drawn from foundational facts.” It has further been held that merely because a person was related to the connected person cannot be itself be a foundational fact to draw an inference.
71. On a careful reading of the above paragraph will show that the argument by placing reliance on the case of K.R. Ajmera to show that presumption can be drawn on the basis of immediate and relevant facts was contrary to the law already settled by the Hon’ble Supreme Court in Chintalapati S. Raju. Therefore, it would be incorrect to submit that the decision in K.R. Ajmera has been overruled. This position becomes clearer as the decision in K.R. Ajmera was referred to in Chintalapati S. Raju as could be seen in paragraph 30 of the said judgment. Therefore, we hold that the law laid down in K.R. Ajmera continues to be good law.
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72. In the light of the above discussion, the only conclusion that can be arrived at is that the opinion can be formed and the decision can be taken by taking note of the surrounding circumstances which had been elaborated upon in K.R. Ajmera.

73. It is very rare and difficult to get direct information or evidence with regard to the prior meeting of minds of the persons involved in the manipulative activities of price rigging and insider trading. We can draw a parallel in cases of adulteration of food stuff, more than often action is initiated under the relevant Act after the adulteration takes place, the users of adulterated products get affected etc. Therefore, a holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, we cannot loose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The Income Tax department was not privy to such peculiar trading activities as they appear to have been done through the various stock exchanges and it is only when the assessees made claim for a LTCG/STCL, the investigation commenced. As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who were involved in the trading of the shares of these companies which are all classified as penny stocks companies. Therefore, the argument of the assessee that the copy of the investigation report has not been furnished, the persons from whom statements have been recorded have not been produced for cross examination are all contention which has to necessarily fail for several reasons which we have set out in the proceedings ITAT NO. 06 OF 2022 AND ETC. BATCH paragraphs. To reiterate, the assessee we not named in the report and when the assessee makes the claim for exemption the onus of proof is on the assessee to prove the genuinity. Unfortunately, the assessees have been harping upon the transactions done by them and by relying upon the documents in their hands to contend that the transactions done were genuine. Unfortunately, the test of genuinity needs to be established otherwise, the assessees are lawfully bound to prove the huge LTCG claims to be genuine. In other words if there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of time of little more than one year, the genuinity of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so as mandated in Section 68 of the Act. Thus, the assessees cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently they are entitled to claim LTCG on their transaction. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise. It is incorrect to argue that the assessees have been called upon to prove the negative in fact, it is the assessees duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuinity and identity. The assesses cannot be heard to say that their claim has to be ITAT NO. 06 OF 2022 AND ETC. BATCH examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The assesses have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. The revenue had placed heavy reliance on the decision in McDowell to show that the claim of the assessee is not case of tax planning to be one of the tax avoidance by indulging in dubious methods. Mr. Bagaria had argued the rule in McDowell was considered in Azadi Bachao Andolan and Vodafone International and it is in the manner explained in these decisions the rule in McDowell needs to be applied. From paragraph 138 onwards the Hon’ble Supreme Court considered in detail as to why McDowell and what it says and what it does not say. The argument of Mr. Bagaria would primarily rests on as to what would mean by a sham transaction as a legal one and it is pointed out that all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. Further by referring to the decision in Vodafone International, it is submitted that the revenue cannot start with the question as to whether the transaction was a tax deferment/avoidance but the revenue should apply the “look at” test to ascertain its true legal nature and that genuine strategic planning had not been abandoned. Further the revenue has to establish on the basis of facts and circumstances surrounding the transactions that the impugned transaction is a sham or tax avoidance. In this regard Mr. Bagaria ITAT NO. 06 OF 2022 AND ETC. BATCH also referred to the decision in the case of Hill Country Properties Limited Versus Goman Agro Farms Private Limited 90 and also the decision in IRC Versus Duke of Westminster 91 .

74. In our considered view we need not travel thus far and wide to examine as to how and what is said and what is not said in McDowell Mr. Soumen Bhattacharya referred to the decision for the simple reason, to point out that tax planning may be legitimate provided it is within the frame work of law as colourable devices cannot be part of tax planning which cannot be encouraged. Therefore what we are required to see is whether the claim made by the assesees before us are legitimate and whether there was any colourable devices adopted in the process and these colourable devices may or may not be directly but indirectly attributable to the assessee. Therefore, we need not labour much to examine as to how rule in McDowell needs to be applied as we are required to examine the factual scenario from the cases on hand which appear to be quite unique not probably drawn the attention of the courts and the tribunal earlier.

75. While it may be true that M/s. Swati Bajaj, Mr. Girish Tigwani or other assessees who are before us could have been regular investors, investors could or could not have been privy to the information or modus adopted. In our considered view, what is important is that it is the assessee who has to prove the claim to be genuine in terms of Section 68 of the Act. Therefore, the assessee cannot escape from the burden cast upon him and unfortunately in these cases the burden is heavy as the facts establish that (2015) SCC Online Hyderabad 1021 (1936) AC 1 – House of Lords ITAT NO. 06 OF 2022 AND ETC. BATCH the shares which were traded by the assessees had phenomenal and fanciful rise in price in a short span of time and more importantly after a period of 17 to 22 months, thereafter has been a steep fall which has led to huge claims of STCL. Therefore, unless and until the assessee discharges such burden of proof, the addition made by the assessing officer cannot be faulted.

76. It was argued that unless there are foundational facts, circumstantial evidence cannot be relied on. This argument does not merit acceptance as wealth of information and facts were on record which is the outcome of the investigation on the companies, stock brokers, entry operators etc. Based on those foundational facts the department has adopted the concept of “working backward” leading to the assessees. While at that relevant stage the sounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over, were all taken into consideration to negative the claim for exception made by the assessee. Therefore, the department was fully justified in taking note of the prevailing circumstances to decide against the assessees.

77. While on the issue regarding the onus of proof, it would be beneficial to refer to the decisions which were relied on. In Durga Prasad More, the Hon’ble Supreme Court pointed out that on the question of onus that law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not and it depends on the facts and circumstances of each case. It was further held that in some cases, the onus may be heavy whereas in others, it may be nominal. In the said case the assessee was receiving some income which he stated that it is not his ITAT NO. 06 OF 2022 AND ETC. BATCH income but that of his wife. On facts, it was found that the assessee’s wife is supposed to have had Rs. 2 lakhs neither deposited in bank, nor advanced to others but safely kept in a safe. The assessee was unable to show from what source she built up the amount and Rs. 2 lakhs before the year 1940 which was a big sum during the relevant time. The Tribunal disbelieved the story of the assessee and held it to prima facie be a fantastic story, a story that does not accord with human probabilities. It was further held that the Courts and Tribunals have to judge the evidence before it by applying the test of human probabilities, human minds may differ as to the reliability of a piece of evidence but in that sphere, the decision of the final fact finding authority is made conclusive by law.

78. In Sumati Dayal, the appeals were filed by the assessee against the order passed by the Income Tax Settlement Commission. On the aspect of burden of proof, it was pointed out 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 exemption provided by the Act, lies upon the assessee. With regard to the effect of Section 68 of the Act, it was held that where any sum is found credited in the books of the assessee in previous year, the sum 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 Assessing Officer, not satisfactory. It was further held that in such a case, the prima facie evidence against the assessee namely, the receipt of money and if he fails to rebut, the said evidence being ITAT NO. 06 OF 2022 AND ETC. BATCH unrebuted, can be used against him by holding that it was a receipt of an income nature. The Hon’ble Supreme Court proceeds to discuss the facts of the case where the dispute was whether the winnings of the assessee therein were from horse races. Pointing out as to how this matter has to be examined, it was held that the matter has to be considered in the light of human probabilities and by applying the said test it was held that the assessee’s claim therein about the amount being her winnings from horse races was not genuine.

79. It was argued on behalf of the assessees that the decision in Durga Prasad More and Sumati Dayal cannot be relied upon by referring to the factual scenario in those cases. The question would be as to whether the interpretation sought to be given by the learned Advocates for the assessees as regards the principle laid down by the Hon’ble Supreme Court in the aforementioned decisions is justified or not. In Salmond On Jurisprudence, 12th Edition, the concept of ratio decidendi was explained by stating that what it decides generally, is the ratio decidendi or rule of law for which it is authority; what it decides between the parties includes far more than just this. The principles that have to be borne in mind, is to determine the ratio of any particular case which was explained. Further, a ratio is the rule the Judge acted on and it would be always said for certain what the rule was as in some cases an order or judgment is unsupported by reasons and the others there are lengthy judgment in which may be embodied several different propositions of all which support the decision. Therefore, the principle laid down in the decision has to be looked into by ITAT NO. 06 OF 2022 AND ETC. BATCH culling out the ratio laid therein. Therefore, the revenue is fully justified and cannot be precluded from referring to the above decisions.

80. The decisions in Durga Prasad More and Sumati Dayal have been consistently referred in subsequent decisions of the Hon’ble Supreme Court and in this regard, it will be beneficial to refer to the decision in P. Mohanakala. The questions of law which were framed for consideration are more or less identical as the substantial questions of law raised before use with regard to the burden of proof cast on the assessee under Section 68 of the Act. It was held that the expression “the assessee offers no explanation” means where the assessee offers no proper, reasonable and acceptable explanation as regard the sums found credited in the books maintained by the assessee. Further it was pointed out that in cases where the explanation offered by the assessee about the nature and source of sums found credited in the books is not satisfactory shows, prima facie evidence against the assessee namely, the receipt of money, the burden is on the assessee to rebut the sum and if he fails to rebut, it can be held against the assessee that it was a receipt of an income nature. Further, it was held that in the absence of satisfactory explanation of the assessee, the Income Tax Officer may assume that cash credit entries in the books represented income from undisclosed sources. In the said case also the Court took note of the fact that the Assessing Officer considered various surrounding circumstances before rejecting the explanation offered by the assessee which finding was approved by the Hon’ble Supreme Court as it was based on the material available on record and not on any conjectures and surmises.
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81. In Roshan Di Hatti, it was held that the onus of proving the source of money found to have been received by an assessee is on him, if he disputes, it is not liable to tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation and in the absence of such proof the revenue is entitled to treat it as taxable income. Further, it was held that where the nature of and source of a receipt whether it be of money or of the property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that the income is from any particular source.

82. In Kale Khan Mohammad Hanif, one of the questions referred was whether the burden of proof, source of cash credit is on the assessee. It was held that the answer to question must be in the affirmative and that is how it was answered by the High Court therein. It was held that the onus of proving the source of the sum of money found to have been received by the assessee is on him, if he disputes liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provision of the Act.

83. In Tharakumari, the appeal by the assessee was questioning the correctness of the finding as to whether LTCG claimed by the assessee, which was brought to tax by the Assessing Officer as unexplained income under Section 68 of the Act was justified. The said case also arose out of a penny stock where the assessee had purchased shares in M/s. Luminaries Technologies Ltd. The Division Bench of the Madras High Court took note of the findings recorded by the Tribunal which also referred to the report of the ITAT NO. 06 OF 2022 AND ETC. BATCH DITI, Kolkata and held that the nature of transactions of sale of shares of a shell company was rightly held to be sham transactions and the same are to be taxed as undisclosed income under Section 68 of the Act.

84. In N.R. Portfolio Pvt. Ltd., the substantial question of law framed for consideration was whether the Tribunal was right in deleting the additions under Section 68 of the Act and whether the decision of the Tribunal is perverse. While answering the said question, it was pointed out that the Assessing Officer is both an investor and an adjudicator. The Assessing Officer can also refer to incriminating material or evidence available with him and call upon the assessee to file their response and a general and universal procedure or method to be adopted by the Assessing Officer while verification of facts cannot be laid down. Further, the manner and mode of conducting assessment proceedings has to be left to the discretion of the Assessing Officer and the same should be just, fair and should not cause any harassment to the assessee. Further, it was held that the provisions of the Evidence Act are not applicable but the Assessing Officer being a quasi-judicial authority, must take care and caution to ensure that the decision is reasonable and satisfies the balance of equity, fairness of justice and the principle of preponderance of probabilities apply. The assessee argued that the revenue must have evidence to show circulation of money from the assessee to the third party which contention was rejected by the Court holding it to be fallacious and after referring to the decision in A. Govindarajulu Mudaliar Versus CIT 92 wherein the Hon’ble Supreme Court observed that it is not the duty of the revenue to adduce (1958) 34 ITR 807 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH evidence to show from what source income was derived and why it should be treated as concealed income and the assessee must prove satisfactorily the source and the nature of cash received during the accounting year and it is not necessary for the revenue to locate the exact source. Further, it was observed that the Court was conscious of the doctrine of “source of source” or “origin of origin” and pointed out as follows:

“We are conscious of the doctrine of ‘source of source’ or ‘origin of origin’ and also possible difficulty which an assessee may be faced with when asked to establish unimpeachable creditworthiness of the share subscribers. But this aspect has to be decided on factual matrix of each case and strict or stringent test may not be applied to arms length angel investors or normal public issues. Doctrine of ‘source of source’ or ‘origin of origin’ cannot be applied universally, without reference to the factual matrix and facts of each case. The said test in case of normal business transactions may be light and not vigorous. The said doctrine is applied when there is evidence to show that assessee may riot be aware, could not have knowledge or was unconcerned as to the source of money paid or belonging to the third party. This may be due to the nature and character of the commercial/business transaction relationship between the parties, statutory postulates etc. However, when there is surrounding evidence and material manifesting and revealing involvement of the assessee in the “transaction” and that it was not entirely an arm’s length transaction, resort or reliance to the said doctrine may be counterproductive and contrary to equity and justice. The doctrine is not an eldritch or a camouflage to circulate ill-gotten and ITAT NO. 06 OF 2022 AND ETC. BATCH unrecorded money. Without being oblivious to the constraints of the assessee, an objective and fair approach/determination is required.”
85. The Court then proceeded to refer to the decision of the Full Bench in CIT Versus Sophia Finance Ltd.93 wherein it was held as follows:

“In this analysis, a distillation of the precedents yields the following propositions of law in the context of s. 68 of the IT Act. The assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber; (4) if relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the shareholders register, share application forms, share transfer register etc., it would constitute acceptable proof or acceptable explanation by the assessee; (5) the Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee nor should the AO take such repudiation at face value and construe it, without more, against the assessee; (7) the AO is duty bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation.”
(1993) 113 CTR (Del) (FB) 472 : (1994) 205 ITR 98 (Del) (FB) ITAT NO. 06 OF 2022 AND ETC. BATCH
86. The Court referred to the decision in Commissioner of Income Tax Versus Nova Promoters Finlease Private Limited 94 wherein it was held that in view of the link between the entry providers and incriminating evidence, mere filing of PAN, acknowledgement of IT Returns of the entry providers, bank account statements etc. where not sufficient to discharge the onus under Section 68 of the Act. Further it was held that credit worthiness cannot be proved by mere issue of a cheque or by furnishing a copy of the bank account and circumstances might require that there may be some evidence of positive nature to show that the said subscribers had made a genuine, investment as well as angel investor after due diligence or for personal reasons and the findings or a conclusion must be practicable, pragmatic and might in a given case take into account that the assessee might find it difficult to unequigibly established credit worthiness of the shareholders. After noting the several decisions, it was held that the Court or the Tribunal should be convinced about the identity, credit worthiness and the genuineness of the transactions and the onus to prove the three factoms is on the assessee as the facts are within the assessee’s acknowledge. Mere production of incorporation details, PANs or the fact that the third persons or the companies had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. Further it was held that the facts in the case reflect proper paper work or the documentation but genuineness and credit worthiness, identity are deeper and obtrusive. It was held that it would be incorrect to state that the onus to prove the genuineness of the (2012) 342 ITR 169 (Delhi) ITAT NO. 06 OF 2022 AND ETC. BATCH transactions and credit worthiness of the creditors stands discharged in all cases if payment is made through banking channels. Whether or not onus is discharged depends upon the facts of each case, it depends on whether the two parties are related or known to each other, the manner or mode by which the parties approached each other, whether the transaction was entered into through written documentation to protect the investor, whether the investor professes an angel investor, the quantum of money, credit worthiness of the recipient and the object and purpose for which payments/investment was made etc. It was held that these facts are basically and primarily in the knowledge of the assessee and it is difficult for revenue to prove and establish the negative. Certification of incorporation of company payment by bank channels etc. cannot be in all cases tantamount to satisfactory discharge of onus.

87. Mr. Agarwal sought to distinguish the decision in Manish D. Jain by pointing out the facts of the case and the modus operandi of the assessee. As pointed out earlier, what we are required to examine in a judgment is the ratio and if we bear the said concept in mind, we would be guided in a proper manner. In the said decision, the judgment in Sumati Dayal was referred to which decision was followed in Sanjay Kaul Versus PCIT 95 wherein it was held that where the assessee was not a regular investor in shares and had only invested in high risk stocks of obscure companies with no business activities or assets, which were identified as the penny stocks, the assessing officer had correctly concluded that the assessee entered into a pre-arranged sham transaction so as to convert (2020) 199 Taxmann.com 470 ITAT NO. 06 OF 2022 AND ETC. BATCH unaccounted money into accounted money in guise of capital loss and therefore, the alleged Short Term Capital Loss (STCL) was rightly disallowed. Similar view was taken in Sanjay Bimalchand Jain Versus PCIT Nagpur 96, in the said case the assessee had purchased shares from the penny stocks companies for a lower amount and within a year, sold such shares at higher amount and the assessee had not tendered cogent evidence to explain as to why the shares in unknown company had jumped to such a higher amount in no time and also failed to provide details of persons, who purchased the said shares and the transaction was held to be an attempt to hedge the undisclosed income as LTCG. In Suman Poddar Versus ITO 97 it was held that the share transactions were bogus because the company whose shares were allegedly purchased was a penny stock and this decision was affirmed by the Hon’ble Supreme Court in (2019) 112 Taxman.com 330. In CIT Versus Oasis Hospitality Private Limited 98 it was held that the initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68 and those are: (i) identity of the investors; (ii) their credit worthiness/investments and (iii) genuineness of the transactions and only when these three ingredients are established prima facie, the department is required to undertake further exercise. The Court after noting the legal position had examined the facts of the case, the modus operandi and (2018) 89 Taxmann.com 196 (2019) 112 Taxmann.com 330 (SC) (2011) 333 ITR 119 (Del) ITAT NO. 06 OF 2022 AND ETC. BATCH allowed the appeal filed by the revenue. This decision was followed in PCIT Versus Prabha Jain 99.

88. The facts in NDR Promoters Private Limited are more or less similar to that of the cases on hand, identical objection was raised by the assessee with regard to the non-production of directors for cross examination etc. and the Court noted the facts in particular that the assessee did not have any business income in the year ending March 31st, 2007 and had a marginal income from other sources in the year ending 31st March 2008 and did not incur any expenditure in the year ending 31st March, 2007 and the shares of face value of Rs. 10/- each were issued at a premium of Rs. 40/-, the total Rs. 50/-. Thus, taking note of the factual position, the Court held that the transaction in question were clearly sham and make believe with an excellent paper work to camouflage their bogus nature.

89. The decision in Sanjay Kaul would also apply to the cases on hand as it was also a case where shares of penny stocks companies were involved and some of the companies are also in the list of companies in which the assessees before us have traded and one such company being Kailas Auto Finance limited. The Court took note of the decision in Suman Poddar Versus ITO 100 and the dismissed appeal filed by the assessee, was dismissed.

90. At this juncture it would be relevant to take note of the decision of the High Court of Delhi in Suman Poddar Versus Income Tax Officer (2021) 439 ITR 304 (Mad) (2019) 112 Taxmann.com 330 (SC) ITAT NO. 06 OF 2022 AND ETC. BATCH (ITO) which was affirmed by the Hon’ble Supreme Court in (2019) 112 taxman.com 330:-

The first, issue which has been raised by the assessee that it has not been confronted with the statements of various parties relied upon by the Assessing Officer. The assessee has also contended that opportunity of cross-examining those parties/persons was not provided to the assessee. According to the assessee, this resulted in the violation of the principles of natural justice and thus assessment should be held void ab intio. However,, in our opinion, not providing opportunity of cross- examination may be in the nature of irregularity which is curable but not an illegality leading to annulling of the assessment. Further, the ld. CIT(A) in para 4.1 of the impugned order has held that addition has not been made solely on the basis of the statement of those persons/parties. The relevant part of the order of Ld. CIT(A) is reproduced as under:
I have considered the submission of the appellant and observation of the AO made in the assessment order on the issue. The appellant has stated that it has not been allowed cross-examination of parties on the basis of whose statement, the addition has been made. On this issue it is observed from the assessment record that the AO has made the addition on the strength of independent analysis of the documents to arrive at the conclusion that the appellant has failed to prove genuineness of the transaction in respect of STCL as discussed above.
ITAT NO. 06 OF 2022 AND ETC. BATCH Statements and other material found in the course of investigation has been used by him as a corroborative material to strengthen his findings. As per the requirements of Section 68 of the Act, the AO has shifted the onus back on the appellant by confronting the adverse findings. Therefore, the appellant has failed to discharge the onus cast upon it u/s. 68 of the Act to explain the transaction. The Investigation Wing has conducted detailed enquiries, made analysis of the seized/impounded documents and made analysis of beneficiaries. The report prepared contains details of complete modus operandi, commission charge against accommodation entries, list of conduit companies, list of their bank accounts in the name of conduits.

The said list contains names of companies in which the appellant dealt. Therefore, the findings in the case of Investigation Wing corroborate the independent findings of the AO. Therefore, the AO was not required to allow the appellant the opportunity to cross-examine.

The Tribunal in the case of Ram Nilwas Gupta, Dehradun vs. DCIT, Dehradun on 6th February, 2019 in ITA No. 4881 to 4883/Del/2016 (Assessment Years: 2010-11, 2012-13 and 2013-14), after considering various decisions of the Hon’ble Supreme Court, including the decision in the case Andaman Timbers Industries vs. Commissioner of Central Excise, Kolkata-II reported in MANU/SC/1250/2015: 2015 (324) E.L.T. 641 (SC), 2017 (50) S.T.R. 93 (SC), 2016 (15) SCC 785 has held as under:

ITAT NO. 06 OF 2022 AND ETC. BATCH In our opinion right to cross-examine the witness who made adverse report is not an invariable attribute of the requirement of the dictum, “audi alteram partem”. The principles of natural justice do not require formal cross-examination. Formal cross- examination is a part of procedural justice. It is governed by the rules f evidence, and is the creation of Court, It is a part of legal and statutory justice therefore it cannot be laid down as a general proposition of law that the revenue cannot rely on any evidence which has not been subjected to cross-

examination.

However, if a witness has given directly incriminating statement and the addition in the assessment is based solely or mainly on the basis of such statement, in that eventuality it is incumbent on the Assessing Officer to allow cross-examination. Adverse evidence and material, relied upon in the order, to reach the finality, should be disclosed to the assessee. But this rule is not applicable where the material or evidence used is of Collateral Nature. We find that the Assessing Officer in the assessment order has referred to the general modus operandi of the bogus accommodation entry and thereafter, he has further referred to statement of the parties who has provided accommodation entry through managing and controlling the shares of the companies, in which the assessee has also transacted. The Assessing Officer thereafter asked the assessee to justify the rationale behind investment in these penny stock companies not having financial worth, however, the assessee failed ITAT NO. 06 OF 2022 AND ETC. BATCH to justify the same. The Assessing Officer provided as why the investment in the shares transacted by the assessee was not justified in view of the comparison of the other shares available. The Assessing Officer also pointed out the price fluctuation in the shares of the companies over a period, dividend history and other financial parameters to substantiate that there was no term capital loss against receipt of cash money. The Ld.

Assessing Officer accordingly concluded that the addition was made on the basis of the material available on record, the surrounding circumstances, the human conduct and preponderance of probabilities.

In view of the above facts and circumstances and in law, we find that in instant case addition in dispute is not solely on the basis of the statement of persons and the Assessing Officer has relied on other materials. The statements of the persons who controlled the business of providing accommodation entry have been corroborated with the material, surround circumstances and preponderance of probability. We accordingly uphold the finding of the CIT(A) on that issue in dispute. The relevant grounds of the appeal of the assessee are accordingly rejected.

After describing the general modus operandi of accommodation entry by way of bogus capital gain/loss, the Assessing Officer has highlighted the statement of the persons who claimed to have provided bogus capital gain/loss entries. The assessee was then asked to justify the investment ITAT NO. 06 OF 2022 AND ETC. BATCH in the relevant shares. The Assessing Officer has pointed out that these companies are not having any significant/real business as seen from the financial statement of those companies. The price movement of the shares was also found to be unrealistic by him. The Assessing Officer has particularly pointed out that price movement of the relevant transacted by the assessee, were not matching with movement of the share market in general and movement of the other scrips in the same line of the business. The Assessing Officer also pointed out that volume transacted in those companies. The ld. Assessing Officer has pointed out that the assessee could not explain, why it invested in such script without knowing the financial performance of the company.

The relevant analysis has been reproduced by the Assessing Officer in Para 3.4 (page 1 J.) of the assessment order. The conclusion of AO has already been reproduced by us in brief facts of the case.

The Hon’ble Delhi High Court in the case of Suman Poddar (supra), observed that shares of Cressanda Solutions Ltd. Have been identified by the Bombay Stock Exchange as penny stock used for obtaining bogus Long Term Capital Gain and no evidence of actual sale except contract notes issued by the share broker were produced by the assessee. The Hon’ble High Court accordingly dismissed the appeal of the assessee as no substantial question of law involved. Thus, Tribunal has in depth analyzed balance sheets and profit and loss accounts of Cressanda Solution is Ltd. Which shows that astronomical increase in share price of said company which led to ITAT NO. 06 OF 2022 AND ETC. BATCH returns of 491 % for Appellant, was completely unjustified. Pertinently, EPS of said company was Rs. 0.01/- as in March 2016, it was Rs. 0.01/- as in March 2015 and -0.48/- as in March 2014. Similarly other financial parameters of said company cannot justify price in excess of Rs. 500/- at which Appellant claims to have sold said shares to obtain Long Term Capital Gains. It is not explained as to why anyone would purchase said shares at such high price.

Tribunal goes on to observe in impugned order as follows:

With such financials an affairs of business, purchase of share of face value Rs. 10/- at rate of Rs. 491/- by any person and assessee’s contention that such transaction is genuine and credible and arguing to accept such contention would only make decision of judicial authorities fallacy.

Evidences put forth by Revenue regarding entry operation fairly leads to conclusion that assessee is one of beneficiaries of accommodation entry receipts in form of long term capital gains assessee has failed to prove that share transactions are genuine and http://itatonlin.org could not furnish evidences regarding sale of shares except copies of ITA 841/2019 Page 7 of 10 contract notes, cheques received against overwhelming evidences collected by Revenue regarding operation of entire affairs of assessee. This cannot be case of intelligent investment or simple and straight case of tax planning to gain benefit of long term capital gains earnings @ 491% over period of 5 months is beyond ITAT NO. 06 OF 2022 AND ETC. BATCH human probability and defies business logic of any business enterprises dealing with share transactions net worth of company is not known to assesses. Even brokers who coordinated transactions were also unknown to assessee. All these facts give credence to unreliability of entire transaction of shares giving rise to such capital gains ratio laid down by Hon’ble Supreme Court in case of Sumati Dayal vs. CIT case. Though assessee has received amounts by way of account payee cheques, transactions cannot be treated as genuine in presence of overwhelming evidences put forward by Revenue fact that in spite of earning such steep profits assessee never ventured to involve himself in any other transaction which broker cannot be mere coincidence of lack of interest. Reliance is place on judgment in case of Nipun Builders and Developers Pvt. Ltd. (supra) where it was held that it is duty of Tribunal to scratch surface and probe documentary evidence in depth, in light of conduct of assessee and other surrounding circumstances in order to see whether assessee is liable to provisions of section 68 or not in case of NR Portfolio, obtrusive. Similarly bank statements provided by assessee to prove genuineness of transaction cannot be considered in view of judgment of Hon’ble Court in case of Pratham Telecom India Pvt. Ltd. Wherein it was stated that bank statement is not sufficient enough to discharge burden. Regarding failure to accord opportunity of cross examination, we rely on judgment of Prem Castings Pvt. Ltd. Similarly tribunal in case of Udit Kalra ITA No. 6717/Del/2017 for assessment year 2014-15 has ITAT NO. 06 OF 2022 AND ETC. BATCH categorically held that when there was specific confirmation with Revenue that assessee has indulged in ITA 841/2019 page 8 of 10 non-genuine and bogus capital gains obtained from transactions of purchase and sale of shares, it can be good reason to treat transactions as bogus difference of case of Udit Kalra attempted by Ld. AR does not add any credence to justify transactions. Investigation Wing has also conducted enquires which proved that assessee is also one of beneficiaries of transactions and entries provided, Even BSE listed this company as being used for generating bogus LTCG. On facts of case and judicial pronouncements will give rise to only conclusion that entire activities of assessee is colourable device to obtain bogus capital gains.

Hon’ble High Court of Delhi in case of Udit Kalra ITA No. 220/2009 held that company had meagre resources and astronomical growth of value of company’s shares only excited suspicion of Revenue and hence, treated receipts of sale of shares to be bogus. Hon’ble High Court has also dealt with arguments of assessee that he was denied right of cross examination of individuals whose statements led to enquiry. Ld. AR arguments that no question of law has been framed in case of Udit Kalra also does not make any tangible difference to decision of this Case, Since additions have been confirmed based on enquiries by Revenue, taking into consideration ratio laid down by various High Courts and Hon’ble Supreme Court, our decision is equally applicable to receipts obtained from all three entities. Further, reliance is also placed on orders of various Courts and Tribunals listed below. MK Rajeshwari vs. ITO ITAT NO. 06 OF 2022 AND ETC. BATCH in ITA No. 17231Bang/2018, order dated 12.10.2018. Abhimanyu Soin vs. Sanjay Bimalchand Jain vs. ITO 89 taxmann.com 196.

Dinesh Kumar Khandelwal, HUF vs. ITO in ITA No. 58 & 591 Nag/2015, order dated 24.08.2016.

Ratnakar M Pujari vs. ITO in IT no. 995/Mum/2012, order dated 03.08.2016. ITA 841/2019 page 9 of 10 Disha N. Lalwani vs. ITO in ITA No. 6389/Mum/2012, order dated 22.03.2017. ITO vs. Shamin M. Bharwani MANU/IU/0493/2015: [2016] 69 taxmann.com 65. Usha Chandresh Shah vs. ITO in ITA No. 6858/Mum/2011, order dated 26.09.2014, CIT vs. Smt. Jasvinder Kaur MANU/GH/0241/2013: 357 ITR 638 Facts as well as rationale given by Hon’ble High Court are squarely applicable to case before us.

Hence, keeping in view overall facts and circumstances of case that profits earned by assessee are part of major scheme of accommodation entries and keeping in view ratio of judgments quoted above, we, hereby decline to interfere in order of ld. CIT(A).

91. In Udit Kalra Versus ITO in Manu/De/1507/2019, a similar case of investment in 4000 shares in a penny stock company which share prices increased astronomically within a period of approximately 19 months when the price of acquisition was Rs. 12/- per share, on the date of sale it was Rs. 720/-. The High Court of Delhi affirmed the order passed by the Tribunal and dismissed the appeal filed by the assessee.

92. During the course of argument, it was submitted on behalf of the revenue that if the Court is satisfied that the order of the tribunal is ITAT NO. 06 OF 2022 AND ETC. BATCH perfunctory, the matter may be remanded to the tribunal for fresh consideration. The question would be as to whether remand of the matter to the tribunal is warranted and justified considering the submissions on either side. Unless and until, it is a case of absolutely no material, a remand was not called for. If the tribunal had failed to exercise its jurisdiction and test the correctness of the findings of the CIT (A) and the assessing officer, this Court can very well ignore the decision of the tribunal and consider the findings rendered by the assessing officer and the CIT(A) for its legality.

93. In CIT Bihar Versus S.P. Jain 101, the order passed by the High Court confirming the conclusions arrived at by the tribunal was put to challenge before the Hon’ble Supreme Court and it was contended on behalf of the revenue that tribunal based its conclusion on inadmissible evidence and on wrong facts and gave no reason for rejecting the findings of the income tax officer, failed to take into account the relevant material on record and based its conclusions on mere conjectures and surmises. The question was whether the Court is denuded of jurisdiction to consider the correctness of the findings recorded by the assessing officer and the CIT(A).The Hon’ble Supreme Court while answering the said issue held as follows:-

This question was repeated in its application under s.66(2) but perhaps the High Court thought that questions 2 and 3 or which it directed the Tribunal to state a case would cover the scope and ambit of question 3 on which the revenue had asked for reference. We think that the two questions on which the reference has been made impugn the findings and the (1973) AIR 997 ITAT NO. 06 OF 2022 AND ETC. BATCH validity of the Tribunal’s conclusion that Rs. 10,80,000 was not an income from undisclosed sources, but the, product of a genuine sale by the vendor companies. Though this question, in what circumstances will this Court interfere with the finding given by the Tribunal or arrive at different conclusion to that arrived by it.
In our view, the High Court and this Court have always the ‘jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly irrelevant or where the tribunal draws upon its own imagination imports facts and circumstances not apparent from the record of bases its conclusions or mere conjectures or surmises or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated.
94. At this juncture, it would be relevant to note the powers executable by this Court under Section 260A of the Act. Sections 103, 107, Order 41 rule 33 read with Section 260A (7) of the Act confers ample powers on this Court to interfere with the orders of the learned Tribunal.

95. Regarding the burden of proof in a case arising under Section 68 of the Act, it would be beneficial to refer to the decision of the High Court of Delhi in CIT Nippun Builders and Development Private Limited in ITA NO. 120 of 2012 dated 07.01.2013 wherein it was held as follows:-
ITAT NO. 06 OF 2022 AND ETC. BATCH This principle was reiterated by the Supreme Court in Commissioner of Income Tax v. Devi Prasad Vishwanath Prasad, (1969) 72 ITR 194 wherein Shah, J (as His Lordship then was) held as follows: “The question again assumes that it was for the Income-Tax Officer to indicate the source of the income before the income could be held taxable and unless he did so, the assessee was entitled to succeed. That is not, in our judgment, the correct legal position. Where there is an explained cash credit, it is open to the Income Tax Officer to hold that it is income of the assessee and no further burden lies on the Income-Tax Officer to show that income is from any particular source. It is for the assessee to prove that even if the cash credit represents income it is income from a source which has already been taxed.”

The law as stated above has not undergone any change because of the introduction of Section 68 in the Income Tax Act, 1961. As observed by S. Ranganathan J in Yadu Hari Dalmia Vs. Commissioner of Income Tax, Delhi (Central), (1980) 126 ITR 48, a decision of a Division Bench of this Court:-

“It is well know that the whole catena of sections starting from s. 68 have been introduced into the taxing enactments step by step in order to plug loopholes and in order to place certain situations beyond doubt even through there were judicial decisions covering some of the aspects. For example, even long prior to the introduction of s. 68 in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the ITO, not ITAT NO. 06 OF 2022 AND ETC. BATCH satisfactory, the sums so credited could be charged to income-tax as income of the assessee of a relevant previous year. Section 68 was inserted in the I.T. Act 1961 only to provide statutory recognition to a principle which had been clearly adumbrated in judicial decisions”. Section 68 thus only codified the law as it existed before 1.4.1962 and did not introduce any new principle or rule. Therefore the ratio laid down in the three Supreme Court Judgments is equally applicable to the interpretation of Section 68 of the 1961 Act. We may also state that the learned counsel for the assessee vaguely referred to some decision taking the view that it was necessary for the AO, before making the addition under Section 68, to prove that the share application monies actually emanated from the assessee and represented undisclosed income of the assessee. He, however, did not cite any of those decisions. In any case the law having been laid down by the Supreme Court in the judgments cited above, we do not think that there is any merit in his submission.

A perusal of the order of the Tribunal shows that it has gone on the basis of the documents submitted by the assessee before the AO and has held that in the light of those documents, it can be said that the assessee has established the identity of the parties. It has further been observed that the report of the investigation wing cannot conclusively prove that the assessee’s own monies were brought back in the form of share application money. As noted in the earlier paragraph, it is not the burden of the AO to prove that connection. There has been no examination by the tribunal of the assessment proceedings in any detail in order to demonstrate that the assessee has discharged its onus to prove not only the identity of the ITAT NO. 06 OF 2022 AND ETC. BATCH share applicants, but also their creditworthiness and the genuineness of the transactions. No attempt was made by the tribunal to scratch the surface and probe the documentary evidence in some depth, in the light of the conduct of the assessee and other surrounding circumstances in order to see whether the assessee has discharged its onus under Section 68. With respect, it appears to us that there has only been a mechanical reference to the case-law on the subject without any serious appraisal of the facts and circumstances of the case.

96. Mr. Roy Chowdhury had pointed out to the findings recorded by the assessing officer in the case of Dinesh Kumar Bansal which is the subject matter of ITAT NO. 31 of 2020 wherein the assessee had invested in Kailash Auto Finance. In his submission, the order of the assessing officer is a well written order and he had elaborately referred to the findings recorded by the assessing officer. On going through the said order, we find the assessing officer has cogently brought out the factual scenario to establish machinations of fraudulent, manipulative and deceptive dealings and how the stock exchanges system was misused to generate bogus LTCG. On going through the order, we agree with Mr. Roy Chowdhury that the order of the said assessing officer is a well- reasoned order. Further we note that there is also discussion on the various decisions by the assessing officer after recordings findings on facts which in our opinion is an appropriate method of referring to and relying upon the legal precedence.

97. The revenue relied upon the order passed by the Hon’ble Supreme Court in Daniel Merchant Private Limited Versus ITO and others Special ITAT NO. 06 OF 2022 AND ETC. BATCH Leave to Appeal No. 23976 of 2017 dated 10.04.2017 wherein the judgment of this Court was confirmed wherein the CIT had passed orders under Section 263 of the Act. It is submitted that in cases where the order impugned before the tribunal where orders passed by the Commissioner under Section 263, independent reasons have been given by the Commissioner as to how the order passed by the assessing officer was erroneous in so far as it is prejudicial to the interest of revenue. In this regard, Mr. Prithu Dhudhoria learned standing counsel has taken us through the order passed by the Commissioner which are subject matter of ITAT No. 122 of 2021 and ITAT No. 156 of 2021.

98. In a few appeals, the order of the Tribunal has been passed in appeals filed by the assessees against the orders passed by the Commissioner invoking the power under Section 263 of the Act. The Learned Senior Counsel for the assessee submitted that the assumption of jurisdiction by the Commissioner under Section 263 is thoroughly flawed that there has been violation of principles of natural justice in as much as the Commissioner has pre-decided the issue even at the stage of issuance of show cause notice.

99. While proposing to invoke the power under Section 263 of the Act, the question as to whether the Commissioner was justified in invoking the power under Section 263 has to be decided based on facts of each case. The assessee cannot be allowed to contend that the language employed in the orders passed by the Commissioner under Section 263 does not mention about how the assessments order was erroneous in so far as it is prejudicial to the interest of revenue. These words or phrases are contained in Section ITAT NO. 06 OF 2022 AND ETC. BATCH 263 of the Act. Merely because the Commissioner has not used these words or phrases occurring in Section 263 will not vitiate the assumption of jurisdiction. What is required to be seen is the content of the order and the discussion and findings rendered by the Commissioner. This is because the cardinal principle is that substance over form has to be preferred. The Commissioner while issuing the show cause notice had come to the prima facie conclusion that the assessing officer did not conduct an enquiry as required to justify such prima facie opinion. The Commissioner was required to set out as to why in his opinion the enquiry by the assessing officer was not proper or insufficient. On reading of the orders passed by the Commissioner under Section 263 which are the subject matter in ITAT No. 156 of 2021 and other similar matters, it is seen that the Commissioner has disclosed to the assessee as to why in his case the power under Section 263 has to be invoked. On reading of the orders passed by the Commissioner, we find that the order to be a reasoned order and there is nothing to conclude. The issue was pre-decided. The assessments orders which are subject matter of Section 263 action shows that an enquiry has not been conducted by the assessing officer in the manner it ought to have been conducted. We say so because, the officers of the income tax department were fully aware of the investigation which was done and the report been circulated and therefore at that stage that the officer had to take note of such report to put the assessee on notice and commenced an enquiry by calling upon the assessee to justify the genuineness of the claim of LTCG/STCL. The assessing officer turned a blind eye to the project investigation which was carried out by the department. The assessing officer lost sight of the fact ITAT NO. 06 OF 2022 AND ETC. BATCH that the enquiry did not commence from that of the assessee and more particularly the name of the assessee did not feature in the investigation report. Therefore the assessing officer was bound to cause an enquiry by calling upon the assessee to explain and justify the genuineness of the claim for exemption made by them. If the assesses has not established the genuinity at the “other end” the assessing officer would have no other operation except making the addition under Section 68 of the Act. We find that in these cases the assessing officers missed an important point as to what is the nature of enquiry which he is required to do. The assessing officer merely went by the submission that the stock broker is a public sector company. Unfortunately this is not the manner in which the enquiry should have been conducted. The entire case before the department was the genuinity of the claim for LTCG/STCL and the basis was unhealthy and steep rise of the price of the shares of mostly the paper companies though listed before the stock exchanges their shares were very rarely traded and in the background of these facts the enquiry should have been conducted by the assessing officer. Therefore we are of the clear view that the assumption of jurisdiction under Section 263 of the Act by the respective Commissioners was fully justified and are shown to be proper exercise of power. The tribunal while interfering with the orders of the Commissioner once again posed a wrong question to itself and failed to approach the matter in the proper perspective considering the backgrounds in which the power was invoked. The tribunal brushed aside the surrounding circumstances which have led to such assessments or orders under Section 263. The manipulative practice adopted by the stock brokers and entry operators was ITAT NO. 06 OF 2022 AND ETC. BATCH not even adverted to by the tribunal and the entire matter was dealt with in a very superficial manner without dwelling deep into the core of the issue. The tribunal being the last fact finding authority was required to go deeper into the issue as the matter have manifested large scale scam. Thus, the orders of the tribunal are not only perfunctory but perverse as well. The exercise that was required to be done by the tribunal is to consider the totality of the circumstances because the transactions are shown to be very complex, the meeting of minds of the “players” can never be established by direct evidence and therefore the surrounding circumstances was required to be taken note of by the tribunal which exercise has not been done. We have considered as to whether in such an event, should the matter be remanded to the tribunal for fresh consideration. We have held that there is no such requirement and that is the Court is empowered to examine the findings recorded by the assessing officer, or the CIT (A) to arrive at a conclusion. The assessees have been harping upon the opinion rendered by the financial experts, professionals in the said field the information which were available in the media etc. All these opinions are at best suggestions to an investor. The assessees cannot state that merely because an expert had issued a buy call or there was news in the media that a particular shares shows an upwards trend and it is good time for buying those shares. They jumped into the fray the assessees are to be reminded of the doctrine of “caveat emptor”. The assessees cannot take shelter under the opinion given by the experts as it is not the expert who has indulged in the transaction but it is the assessee. Therefore by following such experts advice if the assessee gets into an “web” it is for him to extricate himself from the tangle ITAT NO. 06 OF 2022 AND ETC. BATCH and he cannot reach out to the expert to bail him out. The assessees cannot be heard to say that they had blindly followed advice of a third party and made the investment. Selection of shares to be purchased is a very complex issue, it requires personal knowledge and expertise as the investment is not in a mutual fund. None of the assessees before us have shown to have to made any risk analysis before making their investment in a “penny stock”. If according to them they have blindly taken a decision to invest in insignificant companies they having done so at their own peril have to face the consequences. Thus, the conduct of the assessees before us probabilities the stand taken by the revenue, rightly the mind of the assessee as an investor was taken note to deny the claim for exemption. It is in this background that the human probabilities would assume significance. As observed earlier the doctrine of preponderance of probabilities could very well be applied in cases like the present one. We say human probabilities to be the relevant factor as on account of the fact that the assessees are of individuals or Hindu Undivided Families and the trading has been done in the name of the individual assessee or by the Karta of the HUF. None of the assessee before us have been shown to big time investor. This is evident from the income details of the assessee which has been culled out by the respective assessing officers. Assuming that the assessee is a regular investor as was submitted to us by the learned advocates for the assessees that in any manner cannot improve the situation as the claim for LTCG has been only restricted to the shares which were purchased and sold by the assessees in penny stocks companies. Therefore merely because the assessee had invested in other blue chit companies had earned profit or ITAT NO. 06 OF 2022 AND ETC. BATCH incurred loss cannot validate the tainted transactions. It has been established by the department that the rise of the prices of the shares was artificially done by the adopting manipulative practices. Consequently whatever resultant benefits which accrue from out of such manipulative practices are also to be treated as tainted. However, the assessee had opportunity to prove that there was no manipulation at the other end and whatever gains the assessee has reaped was not tainted. This has not been proved or established by any of the assessee before us. Therefore, the assessing officers were well justified in coming to a conclusion that the so called explanation offered by the assessee was not to their satisfaction. Thus, the assessee having not proved the genuineness of the claim, the creditworthiness of the companies in which they had invested and the identity of the persons to whom the transactions were done, have to necessarily fail. In such factual scenario, the Assessing Officers as well as the CIT(A) have adopted an inferential process which we find to be a process which would be followed by a reasonable and prudent person. The Assessing Officers and the CIT(A) have culled out proximate facts in each of the cases, took into consideration the surrounding circumstances which came to light after the investigation, assessed the conduct of the assessee, took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion which in our opinion is a proper conclusion and in the absence of any satisfactory explanation by the assessee, the Assessing Officers were bound to make addition under Section 68 of the Act.

ITAT NO. 06 OF 2022 AND ETC. BATCH

100. It was argued by the learned Advocates for the assessees that their clients are ordinary people who have made meagre investments and they cannot be branded as scamsters when big players in the market have been left scot free and in certain other cases, the big players who were also branded as scammers were allowed to avail the benefit of the Vivad Se Viswas Scheme. In fact, similar argument was advanced when we heard the applications filed by the revenue to condone the delay in filing in some of the present appeals. The argument on behalf of the assessee was that on account of not filing the appeals by the revenue within the period of limitation, their vested right to avail the benefit of the Vivad Se Viswas Scheme was taken away. We have rejected such an argument firstly by holding that there is no vested right for an assessee to come under the Scheme and this finding was rendered by us after examining the provisions of the V.S.V. Act, secondly we have held that cases cannot be decided based on hypothesis nor can the Court read the mind of the assessee that in the event, the revenue had filed appeal on time, the assessee may have availed the benefit under the V.S.V. Scheme. In fact, we find that the Comptroller and Auditor General has also severely commented upon the action taken by the Income Tax Department on such issues and that no uniform procedure had been followed by the various Income Tax Officers and in certain cases the assessments were not even reopened. Therefore, merely because in certain cases, appeals were preferred within the relevant time enabling, those assessees to avail the benefit of the V.S.V. Scheme can in no manner advance the case of the assessees before us. As has been argued before us by the learned Senior Standing Counsels, in the chain of events, there are ITAT NO. 06 OF 2022 AND ETC. BATCH three main person who are involved, the first of which is the entry operator who is said to have managed the overall scam as the entry operator controls several paper companies which have been utilized for routing the cash. The operator is also in control of some penny stock companies whose shares are listed on recognized stock exchanges. It is true that “penny stock” is not an offensive word or comes with a stigma. Penny stock is a stock which trades at a relatively low prices and market capitals. These stocks are highly speculative and they are categorized as high risk stocks largely due to lack of liquidity. Furthermore, the shares of the penny stock are closely held as the general public is not interested in these stocks due to the poor financials of the listed companies. It is for such reasons the entry operators are said to have chosen these penny stocks. In certain cases before us it has been established that the promoters/ Directors of the penny stock companies are also involved and they allowed the entry operators to manage the affairs of the company in return of a commission paid to them. The third set of persons involved, are the share brokers. As submitted by Mr. S.N. Surana, learned Senior Counsel, the brokers are required to comply with very stringent KYC norms before registering any entity as their client. The SEBI Regulations cast very onerous responsibilities on the share brokers. However, the trend appears that the penny stock companies have no business or very little business got involved with the stock brokers and it is stated that the share brokers receive commission for allowing the paper entities to trade through their terminal and some of the brokers have also stated to be performing the trading activity themselves on behalf of the paper companies. The report states as to why the department has taken an ITAT NO. 06 OF 2022 AND ETC. BATCH investigation as a project, largely due to huge syndicate of the entry operators, share brokers and money launderers. The report states that Kolkata is a very distinctive place among the cities of India, so far as the accommodation entry is concerned and action has been initiated against more than thirty share broking entities and more than twenty entry operators working in Kolkata. The report states that almost everyone has accepted its activity, participation in providing accommodation entry of LTCG. The investigation has also indicated as to how the scheme of merger is being misused. Though the scheme of merger is approved by the Company Court, in the event it is found that such merger was done/ obtained by playing fraud, the Company Court is empowered to revoke the order and it appears that the Income Tax Department has not taken any steps in this regard to approach the Company Court or the Tribunal with such a prayer. Thus, we have no hesitation to hold that the orders passed by the CIT(A) affirming the orders passed by the Assessing Officers as well as the orders passed by CIT under Section 263 of the Act were proper and legal and the Tribunal committed a serious error in reversing such decisions. Mr. Arif Ali, learned Advocate appearing for the appellant in ITAT No. 44 of 2020 (Assessee-Gupta Agarwal) submitted that the facts which have been set out in the memorandum of appeal, is wholly incorrect and does not pertain to the assessee- Gupta Agarwal. We have gone through the memorandum of appeal as well as the substantial questions of law suggested by the revenue and find the same to be not relatable to the assessee. This is on account of non-application of mind both by the Income Tax Department as well as the Officers of the Ministry of Law and Justice.
ITAT NO. 06 OF 2022 AND ETC. BATCH More often we have stated that due care and caution has to be taken when appeals are drafted and filed before this Court and this is not the first case which has come up before us where the pleadings were irrelevant to the facts of the case. However, the substantial questions of law suggested by the revenue is with regard to the correctness of the order of the Tribunal in interfering with the order of the CIT(A) who affirmed the order of the Assessing Officer making the addition under Section 68 of the Act. Furthermore, we have to note that more than 90 appeals were allowed by the Tribunal in a single order and the facts of the 89 assessees were not noted by the Tribunal. In any event, the assessee, Mr.Gupta was quite happy with the result and he made no attempt to request the Tribunal to note his facts which according to him may have been unique as was submitted before us. If the assessees could take shelter under an order passed by the Tribunal which has not discussed even the basic facts of the assessees’ case, we are not inclined to non-suit the revenue on the ground that some of the questions suggested in ITAT No. 44 of 2020 may not be relatable to the assessee- Gupta Agarwal. Therefore, though the grounds are not relatable to the assessee, this will not vitiate the appeal in its entirety as the core is the substantial questions of law which is required to be decided.

101. For all the above reasons, we hold that the Tribunal committed a serious error in setting aside the orders of the CIT(A) who had affirmed the orders of the Assessing Officer and equally the Tribunal committed a serious error both on law and fact in interfering with the assumption of jurisdiction by the Commissioner under Section 263 of the Act.

ITAT NO. 06 OF 2022 AND ETC. BATCH

102. In the result, these appeals are allowed and the substantial questions of law framed/suggested are answered in favour of the revenue and against the assessee restoring the orders passed by the respective Assessing Orders as affirmed by the CIT(A) as well as the orders passed by the CIT under Section 263 of the Act. No costs.

(T.S. SIVAGNANAM, J) I agree.

(HIRANMAY BHATTACHARYYA, J) (P.A- SACHIN/PRAMITA)

CBDT Notifications Clarify whether Gift card or vouchers, Mileage points, reward points, Subscriptions etc are taxable as Virtual Digital Assets

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MASTI

(i) The levy of a 30% tax on income from transfer of VDAs in the hands of the transferor;

(ii) receipt of VDAs for nil or inadequate consideration is taxable in the hands of the recipient; and

(iii) Persons responsible for paying any consideration to Indian residents for transfer of VDAs are obliged under Section 194S of the Act to deduct tax at source (TDS) at 1% with effect from 1 July 2022.

The Act defines Virtual Digital Assets (VDAs) as folows:

(i) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically; (ii) notified non-fungible tokens (NFTs); (iii) any other digital asset as maybe notified by the Central Government.

The Central Government is entitled to issue a notification to exclude any digital assets from the definition of VDA.

The Central Government has issued two notifications bearing numbers 74 and 75 of 2022, both dated 30 June 2022 to clarify whether digital gift cards, loyalty points, etc would be covered in the scope of VDAs. The two Notifications read as follows:

MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 30th June, 2022
(Income-tax)

S.O. 2958(E).––In exercise of the powers conferred by proviso to clause (47A) of section 2 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies following virtual digital assets which shall be excluded from the definition of virtual digital asset:
(i) Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;

(ii) Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;

(iii) Subscription to websites or platforms or application.

2. This notification shall come into force from the date of publication in the Official Gazette.

[Notification No. 74/2022/F. No. 370142/29/2022-TPL (Part-I)]
ANKIT JAIN, Under Secy.

MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 30th June, 2022
(Income-tax)

S.O. 2959(E).––In exercise of the powers conferred by clause (a) of Explanation to clause (47A) of section 2 of the Income-tax Act, 1961 (43 of 1961) (hereinafter referred as ‘the Act’), the Central Government hereby specifies a token which qualifies to be a virtual digital asset as non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but shall not include a nonfungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.

2. This notification shall come into force from the date of publication in the Official Gazette.

[Notification No. 75/2022/F. No. 370142/29/2022-TPL (Part-I)]
ANKIT JAIN, Under Secy.

Taxability of salary reimbursed under a secondment agreement. Karnataka High Court clarifies law in Flipkart-Walmart case

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MASTI

It followed the judgement in the case of GE India Technology Centre Private Limited v. Commissioner of Income Tax and Another (2010) 10 SCC 29.

It was also held that as per Article 12 of the ‘DTAA’, the sums paid could not be regarded as Fee for Technical Services (hereinafter referred to as ‘FTS’) and accordingly, there will be no income of ‘Walmart Inc.’ chargeable to tax in India. The ‘Memorandum of Understanding’ (MoU) dated 12.09.1989 entered into between the Government of India and U.S.A. which is stated to be forming part of the ‘DTAA’ provides that Fee for Included Services (hereinafter referred to as ‘FIS’), which ‘make available to the person acquiring the services’, only would be amenable to tax.

Accordingly, it was held that any service that does not make technology available to the person acquiring the service would not fall in the category of ‘make available’ and accordingly, would stand excluded from the provision of Article -12 of ‘DTAA.’

It was noted that payments in the nature of reimbursement cannot be charged as income under the Act. In the present case, the tax[ayer has paid only the actual cost of salaries of the seconded employees and there is no ‘mark-up’ which is retained by ‘Walmart Inc.’ on such costs. The Court followed the judgment of the Hon’ble Supreme Court in Director of Income Tax (IT)-I v. A.P. Moller Maersk A S (2017) 5 SCC 651 (2018), as also the judgment in Commissioner of Income Tax v. Kalyani Steels Ltd (2017) 5 SCC 651 (2018).

The Court further held that the payment made by the petitioner to ‘Walmart Inc.’ are mere reimbursement of salaries paid to the seconded employees and once such payments are salaries, the same falls outside the purview of ‘FIS’ in terms of Article 12 and 16 of DTAA. In light of the law laid down by the Apex Court in Union of India and Another v. Azadi Bachao Andolan and Another (2017) 5 SCC 651 (2018) and Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax & Another (2017) 5 SCC 651 (2018) provisions of ‘DTAA’ insofar as it is more beneficial to the assessee would prevail over the domestic law and as payments in question being in the nature of salaries under Article 16 cannot be treated as ‘FIS’ by the respondent Authorities by applying Section 9 of the I.T. Act.

The pdf copy of the judgement can be downloaded below.

The full text of the judgement in Flipkart Internet Private Limited v DCIT (International Taxation) is reproduced below:

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 24TH DAY OF JUNE 2022

BEFORE

THE HON’BLE MR.JUSTICE S. SUNIL DUTT YADAV

WRIT PETITION NO.3619/2021 (T-IT)

BETWEEN:

M/S. FLIPKART INTERNET PRIVATE LIMITED
ALYSSA, BEGONIA &
CLOVER EMBASSY TECH VILLAGE,
OUTER RING ROAD,
DEVARABEESANAHALLI VILLAGE,
BANGALORE – 560 103
THROUGH ITS AUTHORISED SIGNATORY
MS. NEHA AGARWAL.
… PETITIONER

(BY SRI TARUN GULATI, SENIOR ADVOCATE FOR
SRI KISHORE KUNAL, SRI PARTH,
MS.ANKITA PRAKASH & SRI PRADEEP NAYAK,
ADVOCATES)

AND:

1. THE DEPUTY COMMISSIONER OF INCOME TAX
(INTERNATIONAL TAXATION),
CIRCLE – 1(1)
ROOM NO.441, 4TH FLOOR,
BMTC BUILDING,
80TH ROAD,
KORAMANGALA,
BANGALORE – 560 095.
2

2. THE COMMISSIONER OF INCOME TAX-1,
(INTERNATIONAL TAXATION),
BMTC BUILDING,
KORAMANGALA,
BANGALORE – 560 095.

3. THE JOINT COMMISSIONER OF INCOME TAX-1,
C.R. BUILDING NO.1,
QUEENS ROAD,
BANGALORE – 560 001.

4. CENTRAL BOARD OF DIRECT TAXES
THROUGH THE SECRETARY
DEPARTMENT OF REVENUE,
MINISTRY OF FINANCE,
GOVERNMENT OF INDIA,
CENTRAL SECRETARIAT,
NORTH BLOCK,
NEW DELHI – 110 001.
… RESPONDENTS

(BY SRI K.V.ARAVIND, ADVOCATE)

***

THIS WRIT PETITION IS FILED UNDER ARTICLE 226 OF
CONSTITUTION OF INDIA, PRAYING TO QUASH THE
IMPUGNED ORDER WITH DIN AND LETTER DATED 01.05.2020
ANNEXURE-A PASSED BY R-1 BEING ILLEGAL AND ARBITRARY
AND ETC.

THIS WRIT PETITION HAVING BEEN HEARD AND
RESERVED ON 16.06.2022 AND COMING ON FOR
PRONOUNCEMENT OF ORDERS, THIS DAY, THE COURT MADE
THE FOLLOWING:
3

ORDER
S. SUNIL DUTT YADAV. J This order has been divided into the following Sections to facilitate analysis:

IV Analysis (A) Whether the application of the petitioner dated 15 15.01.2020 filed under Section 195(2) of the Income Tax Act was not maintainable?

(B) Whether the petitioner is required to deduct 25 TDS under Section 195(2) read with Article 12(4) of the convention between Government of United States of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of FISCAL evasion?

(C) Deduction under Section 195(2) of I.T. Act on 31 the ‘sum chargeable under this Act’ (F) Distinguishing the Judgment in Centrica India 42 Offshore (P.) Ltd. v. Commissioner of Income Tax-I, New Delhi The petitioner has called in question the validity of the order dated 01.05.2020 passed by the first respondent at Annexure-‘A’ whereby the application for ‘Nil TDS Certificate’ has been rejected and the petitioner has been directed to deduct tax at source at the applicable rate. The conclusion arrived at, in the impugned order is as follows:-

“Conclusion:
49. In the preceding paragraphs, the need for secondment, nature of services provided by seconded employees, employer-employee relationship and the taxability of the payments have been discussed elaborately and the following has been established;
1. There is no employer-employee relationship between M/s Flipkart Internet Private limited India and secondees seconded by assessee.
2. The services rendered/provided by the seconded employees are in the nature of technical services, both under IT Act and under DTAA as well.
3. Deduction u/s 192 does not result in double deduction nor does it obviate the need to deduct u/s 195.
4. Once the income is in the nature of FTS/FIS, it is to be taxed on gross basis; there is no need to examine whether or not income element is embedded in the said payment.”
2. Consequent to the grant of relief at prayer (a), the petitioner has sought for issuance of writ of mandamus to direct the first respondent to issue ‘Nil Tax Deduction at Source Certificate’ to the petitioner under Section 195(2) of the Income Tax Act, 1961 [‘I.T. Act’ for brevity]. I. BRIEF FACTS:-

3. The petitioner is stated to be engaged in the business of providing Information Technology Solutions and Support Services for e-commerce industry. In the course of its business, the petitioner is stated to have made payments in the nature of “pure reimbursements” to M/s.Walmart Inc., Delaware, USA (hereinafter referred to as ‘Walmart Inc.’) for the Assessment Year 2020-2021 and in that regard had requested the Department for issuance of a ‘Certificate of No Deduction of Tax at Source’. The payment of salaries to the deputed expatriate employees were stated to have been made by ‘Walmart Inc.’ for administrative convenience and the petitioner had made reimbursements to ‘Walmart Inc.’ With respect to such payments, the petitioner had sought for granting of Certificate under Section 195 of the I.T. Act.
4. ‘Walmart Inc.’ and Flipkart Singapore had entered into an Inter-Company Master Services Agreement (M.S.A.) dated 28.05.2019 for secondment of employees and provision of services. In terms of the M.S.A., either of the parties or its affiliates could use the seconded employees.

5. That Clause 4.2 provides that the party placing the secondees will invoice the compensation and the wage cost of secondees incurred in the Home Country.

6. It is pointed out that the M.S.A. has two distinct parts – (i) relating to provision of services and (ii) secondment of employees. The present petition is concerned only with the secondment of employees.

7. It is the stand of the petitioner that in terms of the M.S.A., ‘Walmart Inc.’ had seconded four employees to the petitioner and had entered into a ‘Global Assignment Arrangement’ with the seconded employees, which provided that the seconded employees would work for the benefit of the petitioner.

8. The petitioner is stated to have issued the letters of appointment confirming the employment of seconded employees with the petitioner and in such letters of appointment, the details of responsibilities of the seconded employees has been detailed.

9. It is stated that the petitioner makes contribution to the Provident Fund Authorities as an ’employer of seconded employees’ and that the said employees are working in India on ‘Employment VISA’ wherein, the petitioner is declared to be an ’employer’.

10. In response to the invoices raised by ‘Walmart Inc.’ as regards the payments made towards salaries of the seconded employees, the petitioner had intended to make payments to ‘Walmart Inc.’, and in that context, had made an application at Annexure-‘G’ under Section 195(2) of the I.T. Act requesting for allowing the remittance of cost-to-cost reimbursements to be made by the petitioner without deduction of tax at source.

11. It is also submitted that ‘Indo-US Double Taxation Avoidance Agreement (‘DTAA’ for brevity) would be of relevance, as double taxation at source where a non-resident earns income in India and is liable for being taxed for such income in the Country of residence, is to be avoided.

12. However, the said application came to be rejected while directing the petitioner to deduct tax at source on the premise as found in the conclusion of the impugned order reproduced supra at para-1.

II. CONTENTIONS OF PETITIONER:-

13. The petitioner is not required to deduct tax under Section 195 on payments which are in the nature of reimbursement, as ‘withholding obligations’ under Section 195 arise only when the ‘sum paid’ to the non-resident is ‘chargeable to tax’ under the Act. Reliance is placed on the judgment in the case of GE India Technology Centre Private Limited v. Commissioner of Income Tax and Another1. (2010) 10 SCC 29
14. As per Article 12 of the ‘DTAA’, the sums paid could not be regarded as Fee for Technical Services (hereinafter referred to as ‘FTS’) and accordingly, there will be no income of ‘Walmart Inc.’ chargeable to tax in India.

15. The ‘Memorandum of Understanding’ (MoU) dated 12.09.1989 entered into between the Government of India and U.S.A. which is stated to be forming part of the ‘DTAA’ provides that Fee for Included Services (hereinafter referred to as ‘FIS’), which ‘make available to the person acquiring the services’, only would be amenable to tax.

Accordingly, it is submitted that any service that does not make technology available to the person acquiring the service would not fall in the category of ‘make available’ and accordingly, would stand excluded from the provision of Article -12 of ‘DTAA.’

16. The payments in the nature of reimbursement cannot be charged as income under the Act. In the present case, the petitioner has paid only the actual cost of salaries of the seconded employees and there is no ‘mark-up’ which is retained by ‘Walmart Inc.’ on such costs. Reliance is placed on the judgment of Hon’ble Supreme Court in Director of Income Tax (IT)-I v. A.P. Moller Maersk A S , as also the judgment in Commissioner of Income Tax v. Kalyani Steels Ltd.,3.

17. It is further contended that the payment made by the petitioner to ‘Walmart Inc.’ are mere reimbursement of salaries paid to the seconded employees and once such payments are salaries, the same falls outside the purview of ‘FIS’ in terms of Article 12 and 16 of DTAA. In light of the law laid down by the Apex Court in Union of India and Another v. Azadi Bachao Andolan and Another4 and Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax & Another5 provisions of ‘DTAA’ insofar as it is more beneficial to the assessee would prevail over the domestic law and as payments in question being in the nature of salaries under Article 16 cannot be treated as (2017) 5 SCC 651 (2018) 254 Taxmann 350 (Kar) (2003) 263 ITR 706 (SC) (2021) 432 ITR 471 ‘FIS’ by the respondent Authorities by applying Section 9 of the I.T. Act.

18. It is submitted that the stand of Revenue that Certificate under Section 195 is only tentative and a non-conclusive opinion, is not a legally tenable stand. The prima facie deduction of tax and contingency of refund at a later stage cannot make original levy to be valid, when liability to deduct tax is in excess of jurisdiction.

19. It is submitted that as per Clause 3.1 of M.S.A., the petitioner was granted unconditional right to terminate the employment of seconded employee and looking into the nature of control exercised by the petitioner over the employees, the petitioner would qualify to be the real and economic employer of the seconded employees.

20. ‘Walmart Inc.’ being a tax resident of U.S.A., the disputed transaction will be governed by the provisions of ‘DTAA’ in view of Section 90(2) and whether the payments made by the petitioner to ‘Walmart Inc.’ amounts to ‘FTS’ / ‘FIS’ will have to be determined as per the provisions of Article 12 of ‘DTAA.’ While placing reliance on the judgment in Commissioner of Income-Tax, Central Circle v. De beers India Minerals (P) Ltd6, it is contended that the terms of Article 12 is only to those payments which are made for rendering the technical or consultancy services and making the technical knowledge, experience available to the recipient which only are covered within the meaning of ‘FIS’.

21. Once the transaction is admittedly in the nature of payment of salaries, same is excluded from purview of Section 195 and cannot be subjected to further deduction.

22. The reliance placed by the respondents in Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I, New Delhi7 is misplaced and erroneous. The case is distinguishable insofar as in Centrica India Offshore (supra), the non-resident entity had seconded its employees to the new incorporated Indian subsidiary and the Indian (2012) 346 ITR 467 (KAR) (2014) 227 Taxmann 368 (SC) subsidiary was specifically incorporated to provide back office support services in relation to third party vendors in India. However, in the present case, the petitioner was incorporated on 01.10.2012 and had a well developed and established business model in India much before ‘Walmart Inc.’ became majority equity interest holder in Flipkart Singapore in August 2018.

III. CONTENTIONS OF RESPONDENTS:-

23. Section 195(2) of the I.T. Act provides for determination of appropriate portion of sum chargeable and does not contemplate ‘Nil deduction of tax at source’ and accordingly, Section 195(2) is not applicable.

24. The Assessing Officer has duly considered all the contentions including the relationship of seconded employee with ‘Walmart Inc.’ and has arrived at the conclusion that there is no ’employer-employee’ relationship between M/s.Flipkart Internet Private Limited and the seconded employee. It has further held that the services rendered by the seconded employees are in the nature of technical services under the Income Tax Act and ‘DTAA’, which findings are well considered and do not call for interference in exercise of limited power of judicial review.

25. The mere deduction of tax at source under Section 192 does not obviate the need to deduct tax at source under Section 195, as tax at source is to be deducted on the gross payment and the question of examining the income element embedded therein in the payment does not arise.

26. As the Agreement entered into is between two related parties, even if consideration is agreed on cost-to-cost basis, the character of payment would not be altered.

27. The terms of Agreement would reveal that the payment made is consideration for rendering of technical consultancy services.

28. The purpose of payment if looked into would fall within the ambit of ‘FTS’ in terms of Section 9 as well as in terms of ‘DTAA’.

29. The contention that provision of services rendered by the seconded employees would not fall within the ambit of ‘FTS’ is to be rejected, as the services are provided by seconded employees, who were offered senior positions in the Management and such employees were assigned by ‘Walmart Inc.’ to the petitioner only because of their experience in managerial and consultancy skills required by the petitioner and accordingly, the payment made ought to be construed as ‘FTS’ as defined in Section 9(1)(vii) of the I.T. Act.

30. The examination of documents would reveal that the seconded employees remain the employees of ‘Walmart Inc.’ even during the period of secondment.

31. The deduction of tax at source under Section 192 will not take away the applicability of the appropriate Section. IV. ANALYSIS:-

32. In light of the above factual matrix, the following points arise for consideration:-

(A) Whether the application of the petitioner dated 15.01.2020 filed under Section 195(2) of the Income Tax Act was not maintainable?

(i) It is the contention of Revenue that the application under Section 195(2) is maintainable only in the event of composite payment and that where a ‘NIL Deduction Certificate’ is sought for, recourse is to be made under Section

197.

(ii) It must be noted that the Deputy Commissioner of Income Tax (DCIT) while passing the impugned order has not dealt with such aspect and has rejected the application on its merits. In the present proceedings, wherein the petitioner has sought for setting aside of the impugned order, submission is made by the Revenue that Section 195(2) could not have been invoked.

(iii) If it were the stand that the application was not maintainable, the DCIT ought to have recorded such finding while rejecting the application. In the absence of any finding regarding the non-maintainability of the application, it is not open for the Revenue to canvass such point in the proceedings instituted by the petitioner. The judicial review of the order of DCIT cannot be enlarged by considering fresh contentions which would have the effect of altering the impugned order by reading into its substantive aspects which were not considered by the DCIT.

(iv) As rightly pointed out by the petitioner, such a contention as raised finds a cursory and fleeting mention in the statement of objections filed by the Revenue and cannot be raised for the first time in the present proceedings. Even otherwise, the scope of Section 197 being distinct from that of Section 195(2), as Section 197 would come into operation on an application by the recipient of an income, which is not the factual scenario in the present case.

(v) As per Rule 29BA of Income Tax Rules, 1962, an application can be made by the payer in Form No.15E for grant of Certificate determining appropriate proportion of sum chargeable to tax in the case of payment made to non-resident recipient under Section 195 (2) of the Act.

The relevant extract of Rule 29BA and Form No.15E have been extracted hereinbelow :

“29BA. Application for grant of certificate for determination of appropriate proportion of sum (other than Salary), payable to non-resident, chargeable in case of the recipients.

(1) An application by a person for determination of appropriate proportion of sum chargeable in the case of non-resident recipient under sub-section (2) or sub-section (7) of section 195 shall be made in Form 15E electronically,-

i) under digital signature; or

ii) through electronic verification code.

“[FORM No. 15E [See rule 29BA] [e-Form] Application by a person for a certificate under section 195(2) and 195(7) of the Income-tax Act, 1961, for determination of appropriate proportion of sum (other than salary) payable to non-resident, chargeable to tax in case of the recipient.
To, The Assessing Officer, ……………………….

I ______________ being the person responsible for making payment to a non-resident or to a foreign company any sum (not being income chargeable under the head “Salaries”) do, hereby, request that a certificate may be issued to me after determining the appropriate proportion of such sum chargeable to tax in the case of the recipient (if any) and authorise me to deduct income-tax on such appropriate proportion (if any). …”

(vi) As per Rule 28 of Income Tax Rules, 1962, a person can file an application in Form No.13 for grant of a Certificate for deduction of income tax at any lower rates or no deduction of income tax under Section 197(1). Form No.13 prescribes the format of application that is to be made by the recipient/payee for no deduction of tax at source or lower rate for deduction of tax at source and the relevant portion of the Form is extracted as follows :

[See rules 28 and 37G] [e-Form] Application by a person for a certificate under section 197 and/or sub-section (9) of section 206C of the Income-tax Act, 1961, for no deduction of tax or deduction or collection of tax at a lower rate To The Assessing Officer,

1. I, ……………………………………………………… of ……………………………………………………… do, hereby, request that a certificate may be issued to the person responsible for paying me the incomes/sum, authorising him, not to deduct/deduct income-tax at lower rate, at the time of payment of such income/sum to me. The details are specified in Annexure-I.

and/or I, ……………………………………………………… of ……………………………………………………… do, hereby, request that a certificate may be issued to me for receiving the incomes/sum:-

(i) after deduction of income-tax at lower rate as I do not have the details of the person making payments and their number is likely to exceed ……………………..
(ii) without deduction of income-tax as this application is made for the person/entity specified in rule 28AB.
The details are specified in Annexure-II.
and/or I, ……………………………………………………… of ……………………………………………………… do, hereby request that a certificate may be issued to the Seller/Lessor/Licensor, authorising him to collect income- tax at lower rate at the time of debit of such amount to my account or receipt thereof from me, as the case may be. The details are specified in Annexure-III.
XXXXX ”
Accordingly, the Income Tax Rules and the relevant Form makes it clear that the application under Section 195 is at the instance of the person making the payment, while the application under Section 197 is at the instance of the recipient.

(vii) This Court in Commissioner Of Income-Tax, International Taxation v. Bovis Lend Lease (India) (P.) Ltd.8 has reiterated this position at Para 12, which is as follows:

“12. …….As is clear from Sub-Section (2) of Section 195 of the Act, if the person responsible for paying any amount chargeable under this Act to a non-resident, considers that the whole of such sum would not be income chargeable in the case of the recipient, he may [2012] 208 Taxmann 168 (Kar) make an application to the assessing officer to determine the appropriate portion of such sum so chargeable and upon such determination, tax shall be deducted under Sub-Section (1) only on that proportion of the sum which is so chargeable. However, if the assessing authority is of the view that no tax is chargeable, a certificate to that effect could be issued to the person responsible for making payment. Once a certificate is issued, the liability of the person responsible for paying under the aforesaid provision ceases and without any deduction he may make payment to the non-resident.
Insofar as Section 197 is concerned it provides for a similar application being made by the recipient of the income. On such an application being made under Section 197(1), the assessing officer can give to him such certificate as may be appropriate. If such certificates states no tax is deductible, until such certificate is cancelled by the assessing officer, the person responsible for paying the income is under “No obligation” to deduct tax while making payment. In fact the language employed is “Shall”. Therefore, it is mandatory in nature. What is the effect of such a certificate was the subject matter of interpretation.”

Accordingly, it is clear that Section 197 can be invoked by the recipient and accordingly, the contention that present application under Section 195(2) is not maintainable, is liable to be rejected.

(viii) The Apex Court in Transmission Corpn. of A.P. Ltd. v. Commissioner of Income-Tax9 at para-8 has held as follows:-

“8. …Thereafter, section 195 deals with deduction of tax in cases where payment is to be made to a non-resident which inter alia provides:-
(a) Any person responsible for paying to a non-resident, any interest, or any sum, chargeable under the provisions of this Act (other than interest on securities and salary), shall, at the time of payment, deduct income-tax thereon at the rates in force. Sub-section (1) of Section 195 excludes from its operation the sum which is to be paid as interest on securities or the sum which is chargeable under the head “Salaries” as the deduction on such sum would be governed by other sections, namely, sections 192 and 193.
[1999] 105 Taxmann 742 (SC)
(b) Where the person responsible for paying any sum chargeable under the Act to a non-
resident considers that the whole or such sum would not be chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine “the appropriate proportion of such sums so chargeable”; upon such determination, tax shall be deducted under sub-section (1) only on that portion of the sum which is so chargeable.

(c) Not only this, but sub-section (3) provides that any person entitled to receive any interest or other sum on which income- tax is to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of certificate authorising him to receive such interest or other sum without deduction of tax under the sub-section.

(d) Further, section 197 provides that recipient can file an application to the Assessing Officer for a certificate that the total income of the recipient justify the deduction of income-tax at any lower rates or no deduction of income tax and the Assessing Officer, if satisfied, can grant such certificate as may be appropriate.”

(emphasis supplied)
(ix) It is the further contention of the respondent that, if the petitioner was of the view that the amount is not chargeable under the provisions of the Act, the question of obtaining certification under Section 195(2) or Section 197 does not arise.

(x) The object of Section 195(2) and Section 197 of the Act are in the nature of safeguards for the assessee and are to be invoked to avoid consequences of a finding eventually that the payer ought to have made deduction after assessment and in such case, it would be open to treat the assessee as “an assessee in default” in terms of Section 201 of the I.T. Act, leading to prosecution being initiated under Section 276B against the payer and disallowance of expenses under Section 40(a)(ia) of the I.T. Act.

(xi) Keeping in mind that the determination under Section 195(2) or under Section 197 by grant of Certificate being tentative in nature, the assessee must be permitted to invoke such provision and seek for certificate in order to avoid consequences of non-deduction as enumerated above. It cannot be stated that the assessee is debarred from invoking such a provision if he were of the view that the payment being made was not chargeable under the provisions of the I.T. Act. To place such a heavy burden of adjudication upon the assessee before invoking the tentative determination under Section 195(2), considering the nature of proceedings, may not be called for. Accordingly, the recourse to Section 195(2) is perfectly in consonance with the object of Section 195 and cannot be faulted.

(B) Whether the petitioner is required to deduct TDS under Section 195(2) read with Article 12(4) of the convention between Government of United States of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of FISCAL evasion?

(i) At the outset, it ought to be noted that Section 90(2) of the I.T. Act provides that where the Central Government has entered into an agreement with a country outside India for the purpose of granting relief of tax or for avoidance of double taxation in relation to the assessee, provisions of the Act would apply to the extent they are more beneficial to the assessee.

(ii) The Apex Court in Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax and Another10 has clarified that where the provisions of the ‘DTAA’ is more beneficial than the provisions of the I.T. Act, it is the ‘DTAA’ that should be treated as the law that requires to be followed and applied. The observations at Para-176 would be of relevance, which reads as follows:-

“176. The conclusions in the aforestated paragraph have no direct relevance to the facts on hand as the effect of Section 90 (2) of the Income Tax Act, read with Explanation IV thereof, is to treat the DTAA provision as the law that must be followed by Indian Courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the Assessee. ”
(iii) Article 12(1) of ‘DTAA’ provides for taxation of Royalties and ‘FIS’ arising in a Contracting State and paid to a resident of other Contracting State. Further, Article 12(2) 2021 SCC OnLine SC 159 provides that Royalties and ‘FIS’ may also be taxed in the Contracting State in which they arise.

(iv) ‘FIS’ is defined in Article 12(4) as follows:- “4) For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) xxx

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.”

(v) There must be a comparison between the provisions of the I.T. Act and the provisions of ‘DTAA’ and a finding that ‘DTAA’ is better in light of the provision under Article 12(4) for the purpose of determining whether the payment made by the petitioner to ‘Walmart Inc.’ would constitute ‘FIS’, requires determination.

(vi) Section 195(2) places an obligation on the petitioner to make deduction of tax under sub-section (1) where payment of “any such sum chargeable under this Act” is being made to a non-resident.

(vii) The words chargeable under this Act if read in conjunction with provision of Article 12(4) of ‘DTAA’ and the obligation under Section 195(2) is looked at, it becomes clear that ‘FIS’ as defined under Article 12(4) are more beneficial to the assessee insofar as his obligation to deduct the tax. Accordingly, Article 12(4) requires to be applied to determine liability to deduct tax.

(viii) It is clear that ‘FIS’ under Article 12(4) would refer to payments of any kind to any person in consideration for rendering of technical or consultancy services (including through the provision of services of technical or other personnel) if such services make available technical knowledge, experience, skill, know-how or processes or consists of development or transfer of technical plan or technical design.

(ix) In terms of Article 12(4)(b) for the purpose of construing ‘FIS’, it is necessary that the rendering of technical or consultancy services must make available technical knowledge, experience, skill, know-how or processes. Further, it may also consist of development and transfer of a technical plan or technical design.

(x) Accordingly, it is not a mere rendering of technical or consultancy services, but the requirement of make available in terms of Article 12(4)(b) requires to be fulfilled. In light of the above legal requirement whether the present payment would amount to ‘FIS’ requires to be determined.

(xi) The DCIT while passing the impugned order at Para-36 has concluded that payment made to ‘Walmart Inc.’ will fall in the category of payments made to any person in consideration for rendering technical, consultancy services through the provision of services of technical or other personnel. It is observed that ‘Walmart Inc.’ has through the seconded employees provided technical services to Flipkart Internet Private Limited (India), as technical services would also include provision of services of personnel. In the impugned order what has been lost sight of is the requirement of “make available” in terms of Article 12(4)(b). A perusal of M.S.A. entered on 29.05.2019 would refer to:-

“(a) Clause 2.1.1 – The use of certain services described in Annexure-A are in the Scope of Work concluded between the parties or their Affiliates for the relevant Service;
(b) Clause 2.1.2 – The use of certain Secondees on terms and conditions described in Annexure-B unless the parties agree to the contrary in respect of the particular secondment in the relevant Scope of Work.”
(xii) The M.S.A., if subjected to scrutiny as regards the aspect of secondment does not reveal the satisfaction of the requirement of ‘make available’ which is a sine qua non for being a ‘FIS’.

(xiii) The DCIT has proceeded to pass the impugned order without examining this aspect. The fact that the employees seconded have “the requisite experience, skill or training capable of completing the services contemplated in Secondment” (Clause 6.2.4 of M.S.A.) by itself is insufficient to treat it as ‘FIS’ as has been concluded, de hors the satisfaction of ‘make available.’
(xiv) The proceeding under Section 195 results in a tentative finding more as a safeguard to the payee and if such determination exempts the payee from making a deduction at that stage, such tentative deduction, it must be emphasized is still subject to final determination of taxability qua the recipient.

(xv) Accordingly, the contention of respondents raised at the time of oral arguments that the enquiry regarding ‘make available’ still remains to be determined and is based on further material to be submitted regarding the requisition of the employees by the petitioner is an enquiry that is not called for. As the M.S.A. does not support ‘make available’, further enquiry beyond that may not be called for, considering the nature and scope of proceedings.

(C) Deduction under Section 195(2) of Income Tax Act on the ‘sum chargeable under this Act’:-

(i) As discussed above, it is the provision of ‘DTAA’ that would be of only relevance in determining the necessity of deducting tax. However, de hors the ‘DTAA’, the question of deduction would only arise where the payee is seeking to make payment to the non-resident of a sum chargeable under the I.T. Act.

(ii) The DCIT has grossly erred while concluding that where the payment is made for the services rendered, then whether the charge for the services rendered is equivalent to the cost or not becomes irrelevant. The finding that the services rendered fall within the description of services as in Explanation-2 in Section 9(1)(vi) and that the element of profit is not an essential ingredient of receipt, to make it taxable is erroneous.

(iii) It must be noted that as observed above, the provisions of the I.T. Act, will have to give way to the provisions of ‘DTAA’ when ‘DTAA’ is more beneficial to the assessee. It is in this context that the reliance on Explanation-2 in Section 9(1)(vii) may not be of relevance. The aforesaid provision of the I.T. Act which deals with ‘FTS’ is different from the concept of ‘FIS’ under Article 12(4). The ‘make available’ requirement that is mandated under Article 12(4) grants benefit to the petitioner and accordingly, the question of falling back on the provisions of Section 9 of the I.T. Act does not arise. On this score alone, the conclusion in the impugned order of the payment for the service falling within the description under Section 9 of the I.T. Act as ‘deemed income’, is to be rejected.

(D) Whether Deduction is on gross receipts?

(i) The contention of learned counsel Sri. K.V.Aravind is that normally the deduction is on gross receipts as in cases of Section 194J and Section 194C of the I.T. Act and in light of the principle laid down in Associated Cement Co. Ltd. v. Commissioner of Income-Tax11, in the present case also the deduction should be on the gross remittance.

(ii) Section 194C provides for deductions “at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash….”. Similarly, Section 194J provides for deduction “at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash…..”

(1993) 67 Taxmann 346 (SC)
(iii) In the case of Associated Cement Company Ltd. (supra), the question was as regards deduction of tax under Section 194C(1) and as to whether deduction was to be confined to the income component of that sum was under consideration. The Apex Court has observed that it was neither possible nor permissible to the payer to determine what part of the amount paid by him to the contractor constitutes income of the latter. It was further observed that permitting such ascertainment of income component would result in placing an impossible burden upon the payer and would result in ‘an impractical and unworkable provision’. This would not further the case of the Revenue as Section 194C(1) refers to deduction at the time of credit of ‘such sum’, which is in contradistinction to Section 195 where the deduction is on ‘any other sum chargeable under the provisions of the I.T. Act’

(iv) What needs to be noticed is that the logic of deduction of tax on the gross amount as has been held in respect to Section 194C and Section 194J cannot be extended to Section 195 which specifically uses the term “any other sum chargeable under the provisions of this Act.” Such terminology is absent in Section 194C and Section 194J of the I.T. Act. The difficulty of ascertainment of income component as being an impossible burden on the payer in the context of Section 194C as observed by Apex Court is obviated in the present case, as Section 195(2) provides for a mechanism whereby the Assessing Officer may be called upon to determine “proportion of the sum which is so chargeable.” In fact, in GE India Technology Centre (P) Ltd. (supra), the Apex Court at para-14 has specifically recorded the distinction abovementioned as follows:-

“14. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds the use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in Section 195. For example, Section 194-C casts an obligation to deduct TAS in respect of “any sum paid to any resident”. Similarly, Sections 194-EE and 194-F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act.”

Accordingly, the contention of learned counsel for the Revenue regarding deduction on gross amount deserves to be rejected.

(E) Secondment and reimbursement of costs:

(i) In the impugned order, the DCIT has construed the secondment where services are provided and payment made thereon as being within the ambit of tax liability.

As discussed supra, the ‘FIS’ in terms of the ‘DTAA’ would not include any payment towards provision of mere rendering of service and there must be a sine qua non of ‘make available.’ Further, the payment must be one chargeable under the provisions of I.T. Act.

(ii) The payment is pursuant to M.S.A. and the payment in the present case relates to the secondment of employees. The following clauses of the M.S.A. would be of relevance:-

(a) Clause 1.7 defines secondment as the relationship of assigning a secondee by a party to the other party as contemplated under the Agreement. The payment under the Agreement is also only in respect of the secondment.
(b) Clause 1.5 defines the scope of work
relating to the secondment.
(c) Clause 3.1 which provides that Flipkart
may terminate the services of the secondees.
(d) Clause 4.2 provides that the party placing the secondees can invoice the party receiving the service, the secondment costs, expenses and incidental costs borne by the Home Country.
(iii) While passing the impugned order, the DCIT has concluded that there is no employer-employee relationship between the petitioner and the seconded employees. Such a conclusion is arrived at while noticing that.-

(a) ‘Walmart Inc.’ has the power to decide on continuance of the services with ‘Walmart Inc.’ in U.S.A. after termination of their secondment in India. (see para 11.1 of the impugned order),
(b) ‘Walmart Inc.’ raises invoice after incurring the secondment costs (as per Clause 4.2 of M.S.A.),
(c) The equity eligibility of the seconded employee continues to be tied to ‘Walmart Inc.’.
(iv) However, what would be of significance is the relationship between the petitioner and the seconded employees during the period of secondment that has been lost sight of while passing the impugned order. Accordingly, after the period of secondment or its termination, the fact that ‘Walmart Inc.’ has the power to decide on the employees’ continuance with ‘Walmart Inc.’ would not make any difference, as it would relate to a service condition post the period of secondment. That the equity eligibility of the seconded employee which was a pre-existing benefit (even prior to the secondment) ought not to alter the relationship of employer and employee between the petitioner and the employee. Further, the mere payment by ‘Walmart Inc.’ to the seconded employees would not alter the relationship between the petitioner and the seconded employees, as the petitioner only seeks to make payment to ‘Walmart Inc.’ of its payment to the seconded employee which is stated to be by way of reimbursement.

(v) It ought to be noted that the petitioner as an entity was incorporated on 01.10.2012 and had established an online market place for consumer goods. Only subsequently in 2018 ‘Walmart Inc.’ acquired majority shareholding in the petitioner Company.

(vi) It is not a case where the petitioner is merely acting as a back office for providing support service to the overseas entity, whereby the overseas entity could be treated as an employer.

(vii) The petitioner issues the appointment letter, the employee reports to the petitioner, the petitioner has the power to terminate the services of the employee. For the purpose of a limited finding under Section 195 on the basis of the available material, it could be concluded that the petitioner is the employer.

(viii) The Revenue has relied upon the judgment of the Apex Court in C.C., C.E. & S.T.-Bangalore (Adjudication) etc. v. M/s.Northern Operating Systems Pvt. Ltd.12 where the Apex Court has interpreted the concept of a secondment agreement taking note of the contemporary business practice and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contract whereby employees were seconded to the assessee by foreign group of Companies, had upheld the demand for service tax holding that in a secondment arrangement, a secondee would continue to be employed by the original employer.

(ix) The Apex Court in the particular facts of the case had held that the Overseas Co., had a pool of highly skilled employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning Civil Appeal Nos.2289-2293/2021 such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice.

(x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of man power was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as ‘FIS’ which is “make available” to the Indian Company.

(xi) Accordingly, any conclusion on an interpretation of secondment as contained in the M.S.A. to determine who the employer is and determining the nature of payment by itself would have no conclusive bearing on whether the payment made is for ‘FIS’ in light of the further requirement of “make available.”

(F) Distinguishing the Judgment in Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I, New Delhi13

(i) The petitioner had challenged the order of the ‘Authority for Advance Ruling’ dated 14.03.2012 by virtue of which the Authority had held that the income accruing to the Overseas Entities in view of the existence of a Service Permanent Establishment (Service PE) in India and that tax was liable to be deducted under Section 195.

(ii) The question referred for advance ruling was as to whether the reimbursements made by the petitioner to the Overseas Entities of the actual costs of expenses incurred under the Secondment Agreement is in the nature of income accruing to the Overseas Entities.

(iii) In the challenge before the High Court, the High Court had framed the issue for consideration as to whether the secondment of employees falls within provision of ‘DTAA’ which embodies the concept of ‘Service PE’ (see para-29).
(2014) 227 Taxmann 368 (SC)
(iv) The Delhi High Court has recorded a finding which however is a finding on facts:

(a) That the rendition of service constituted “included service” that made available skill behind that service to the other party.

(b) That the control over the employment by the Overseas Entity was overriding and has approved broadly regarding the existence of Service PE in India.

(c) That the reimbursement is a matter to be demonstrated and the nomenclature cannot be determinative and mere payment of costs where the Entities are related would not take such payment out of the consideration of necessity to deduct.

(v) It must be noted that the conclusion in Centrica (supra) does not further the case of Revenue, as the decision was rendered in the context of facts and on the basis of the material available.

(vi) It must be noted that there was a reiteration of the necessity of demonstration of ‘make available’ apart from rendering of the requisite service for satisfaction of ‘FIS’.

(vii) As regards reimbursement is concerned, the Court has merely reiterated that it is not the nomenclature that it is indeed an actual reimbursement that is required. Further, the Court, in light of the material has recorded a finding of the existence of Service PE by implication.

(viii) All such findings do not take away from the requirement of establishing that:

(a) The Domestic Entity was the real employer, that there was no Service PE in the local Country.
(b) That there was indeed a reimbursement in the true sense and that cost payment among related Entities was to be ignored.
(c) That ‘FIS’ satisfied the ‘make available’ test.
Finally, the judgment in Centrica is on the facts and material on record.

V. CONCLUSION:-

33. In the present case, the stand taken on the material available is on the construction of legal position. As pointed out in the discussion earlier that the understanding of the legal position being erroneous, the only conclusion that could be arrived at is to allow the application.

34. Though the Revenue has raised numerous contentions that further information is required to record a detailed finding, such stand is taken up for the first time in the present proceedings. A perusal of the file of the Department does not make out any instance where the Department had sought for further information which was not furnished. On the contrary, the petitioner has made out detailed representation on the legal position and record does not reflect any requisition for further information remaining unanswered. In fact, the Apex Court in ‘GE India Technology Centre Private Limited’ (supra) has rightly observed at para-16 as follows:-

“16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all…”
35. Further, it must be noticed that the finding as regards deduction of tax at source under Section 195 of the I.T. Act is tentative insofar as the Revenue is concerned. Even if the Revenue orders that there was no obligation to make deduction under Section 195, the question of liability of the recipient still remains to be decided subsequently. Accordingly, the question of prejudice to the Revenue at the stage of Section 195 order is unavailable to it.

36. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated 10.03.2020 addressed to the C.I.T. seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to-cost reimbursement. However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application.

37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside. As observed by this Court in Director of Income Tax (International Taxation) v. Abbey Business Services India (P.) Ltd.14, “it is also pertinent to note that the Secondment Agreement constitutes an independent contract of services in respect of employment with assessee.” Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was ‘FIS’.

38. In light of setting aside of the impugned order in the context of legal position as noticed, the only order that can now be passed is of one granting ‘nil tax deduction at source.’

39. Accordingly, in light of the above discussion, the impugned order at Annexure-A dated 01.05.2020 is set aside (2020) 122 Taxmann.Com 174 (Kar) and the respondent No.1 is directed to issue a Certificate under Section 195(2) of I.T. Act to the effect of ‘Nil Tax Deduction at Source’ as regards the petitioner’s application dated 15.01.2020.

Sd/-

JUDGE VGR/NP

Borrower can stall auction proceedings under the SARFAESI Act and restrain the secured creditor/bank from selling the property only if he deposits the entire dues

Posted on by staff
MASTI

The Supreme Court in Bank of Baroda VERSUS M/s Karwa Trading Company & Anr CIVIL APPEAL NO.363 OF 2022 held that the DRT was not justified in directing to release the mortgaged property and handover the possession along with the original title deeds to the borrower on payment of only the base price/ reserve price. Unless and until the borrower was ready to deposit/pay the entire amount payable together with all costs and expenses with the secured creditor, the borrower cannot be discharged from the entire liability outstanding. Therefore, no order could have been passed either by the DRT and/or by the High Court to discharge the borrower from the entire liability outstanding and to discharge the mortgaged property and handover the possession along with original title deeds to the borrower.

The judgement can be downloaded below