By TIOL News Service

MUMBAI, OCT 03, 2016: THE Issue is - Whether a transaction of 'off market purchase of share' for which payments were made in cash and the brokers had issued pre dated contract notes, is liable to be treated as bogus transaction, and hence such cash receipts are liable to be treated as 'unexplained cash receipts'. YES IS THE VERDICT.

Facts of the case:

The assessee is engaged in the business of running a fast food and juice centre in Iraniwadi in Kandivali (W) under the name and style of Bhagvwati Juice Centre. During the subject year, specific information was received from Addl. CIT Mumbai that the assessee was indulging in nongenuine and bogus capital gains from the transactions of purchase and sale of shares of M/s Shiv Om Investment & Consultancy Ltd., a Kolkatta based company. It was also mentioned in the information received by the Revenue that M/s Shiv Om Investment & Consultancy Ltd. quoted at the Kolkatta Stock Exchange was only a penny stock company and for the purpose of showing the holding period of more than 12 months, M/s Badri Prasad & Sons and other Kolkatta based brokers have issued pre-dated contract notes on the dates prior to July, 2004 for the sale of shares of this company at the rate of Rs. 4/- to Rs.4.50 per share to the various persons. Thus, the Revenue had reason to believe that income chargeable to tax has escaped assessment in the case of the assessee and the assessment was re-opened by issue of notice u/s 148. The AO noticed that assessment in the case of the assessee for the A.Y 2005-06 in which the alleged shares were claimed to be purchased by the assessee was completed u/s 143(3) r.w.s. 147, wherein it was clearly proved that the assessee’s claim of purchase of alleged 4000 shares of M/s Shiv Om Investments and Consultancy Limited on 11th May, 2004 for a consideration of Rs. 4,080/- was bogus and was only a paper transaction. The AO observed that the payments for shares purchased were made through cash and not through banking channel. Thus, he came to the conclusion that the assessee’s claim of receipt of Rs. 4,92,750/- on alleged sale of shares purchased from M/s Shiv Om Investment and Consultancy Limited was not genuine and a fabricated transaction through which the unaccounted money has been converted into accounted money and the same had been treated as unexplained cash credits and brought to tax. On appeal, the CIT(A) upheld the order of AO.

ITAT held that:

1. It is observed that no scrutiny assessment has been framed for the impugned assessment year by the Revenue u/s 143(3) originally, while based on information received from Addl.CIT(Inv.), Unit-V, Mumbai that the assessee is indulging in non-genuine and bogus capital gains from transaction of sale and purchase of shares of M/s Shiv Om Investment and Consultancy Limited which was penny stock company and pre-dated contract notes were issued by the Brokers to manipulate and introduce long term capital gains in favour of the assessee which are exempt from tax u/s 10(38) of the Act leading to escapement of income from taxation, which led to issue of notice u/s 148 which is within four years from the end of the relevant A.Y, the receipt of afore-stated information from Addl. CIT(Inv) is fresh and tangible material which has live link and nexus with the formation of belief that the income of the assessee has escaped assessment, and keeping in view that the original assessment was not framed u/s 143(3) and no opinion was ever formed by the AO and hence there is no change of opinion, we uphold the re-opening of the assessment u/s 147/148. We have observed that the assessee has made purchases of 4000 shares of M/s Shiv Om Investment and Consultancy Limited for Rs.4,080/-.

2. The said shares were purchased in off market transactions for which payments were made in cash. The said purchases have been treated as bogus and sham transactions by the Revenue as it is alleged that certain brokers have manipulated and issued pre-dated contract notes which even did not have details such as time of contract, trade number, transaction details etc and payments were also made in cash by the assessee against such sham and bogus purchase with the objective of introducing by manipulating tax free exempt long term capital gains u/s 10(38) leading to escapement of income from taxation, and the said findings of the AO with respect to bogus and sham purchases have become conclusive and final as the assessee has not challenged the findings of the AO made in the assessment order passed by the AO u/s 143(3) r/w/s 147 in the first appeal filed with CIT(A) and hence the finding of the AO has attained finality. Since the said findings of the AO with respect to purchases of 4000 shares of M/s Shiv Om Investment and Consultancy Limited in assessment year 2005-06 have become conclusive having attained finality, the sales in consequence thereof the sham and bogus purchases cannot be accepted as genuine.

(See 2016-TIOL-1746-ITAT-MUM)