ITAT Denies Exemption under Section 10 (38) For Bogus Share Transactions

Nikhil Mogha

13 Jun, 2024

The Pune Income Tax Appellate tribunal in the Case of Abhishek Ashok Lohade vs ITO 2022 has ruled that where the assessee is unable to prove to the court the genuineness of the transaction of purchase and sale of shares and failed to refute the findings of the quasi-judicial body in regard to the bogus share transactions, in that case, the whole transaction will be held as void ab initio. Therefore, the transaction entered into by the assessee is held to be fraud under the principle “Fraud vitiates everything” and the assessee will not be liable for exemption under clause 38 of Section 10 of the IT act, 1961.

Brief Facts of the Case

The facts of the case are:

• The appellant is a buinessman who derives income from the execution of contracts etc.
• The appellant filed the return of income on 31-03-2015 by disclosing total income as Rs 3, 13, 680.
• The Assessing officer has assessed the said return of income and passed an order under clause 3 of Section 143 of the IT act, 1961, on 28-12-2016 by declaring the assessee’s total income as Rs 55, 15, 180.
• While passing an order, the assessing officer denied the exemption of capital gains under clause 38 of section 10 of the act amounting to Rs 50, 49, 171 and held that transaction of purchase & sale of shares of SRK Industries Ltd. is a bogus share transaction.
• The appellant was provided copies of the investigation report wherein it contains the long-term capital gains entries derived from bogus share transactions. The transactions are entered into by the directors of the M/s. Mobixa Distributors Pvt. Ltd of which the appellant is one of the shareholders.
• During the assessment proceedings, the appellant failed to prove that the transaction entered into was genuine. Therefore, based on these circumstances, the assessing officer brought the sale proceeds of shares under the purview of tax by declaring it as unexplained cash credit.
• Bring aggrieved by order of the assessing officer; the appellant filed an appeal under CIT (A). The CIT (A) upheld the assessing officer’s contention and rejected the appellant’s contentions.
• Being aggrieved by the CIT (A) decision, the appellant filed an appeal before the Pune bench of the Income tax appellate tribunal.

Issue of the Case

Whether the claim of the appellant for bogus share transactions is liable for exemption under cluase 38 of section 10 of the Income Tax Act, 1961?

Submissions of the Respondent

The respondent submits that the decision of PCIT vs Swati Bajaj, 446 ITR 56, Calcutta, is a well-decided case on the point of law and therefore based on the decided principles under the said case, the order of the CIT (A) shall be upheld. It is further contended that despite various opportunities provided to the appellant, the assessee has failed to refute the findings of the assessing officer for bogus share transactions.

Observations of the Tribunal

The court, while dealing with the issue, relied on the Case of CIT vs. Manish D. Jain and observed that in the said case, the court or tribunal had affirmed the action of the assessing officer by stating that the officer had cogently found out about the real factual scenario for establishing the fraudulent, manipulative and deceptive practices. The court observes that in the said case, the assessing officer has discovered how the stock exchange system is manipulated to generate bogus share transactions that lead to long-term capital gains.

The court, while upholding the contentions of the assessing officer observes that the officer has correctly applied the principle “Fraud vitiate everything”   and therefore such transaction is void ab initio. The court based this judgement while relying on the Case of Friends Trading Co. vs Union of India, civil appeal no. 5608 of 2011 wherein it was held that the exemption availed on the forged DEPB license is void ab initio based on the principle that fraud vitiates everything and therefore, the application of a limitation period has no use. In the said case, the department was held justified in holding that even though the beneficiary has no knowledge of a forged DEPF license this does not bar the obligation of the department to impose custom duty. Henceforth, the same principle applies to this case.

Further, the court, while defining the “Principle of Fraud”, observes the following cases:

1. S. P. Chengalvaraya Naidu (dead) by LRs. v. Jagannath (dead) by LRs. and others, AIR 1994 SC 853: The Case of a person which is based on falsehood has no right to approach the court. The person is obliged to produce all documents executed by him that are related to the case. If the person withholds an essential document from the court to gain an advantage on the other side, then the person would be held guilty of playing fraud on the opposite party and the court.
2. Smt. Shrist Dhawan v. M/s. Shaw Brothers, AIR 1992 SC 1555: It is held that fraud vitiates the proceedings in any civilised system of jurisprudence. It is an act of trickery or deceit.
3. State of Andhra Pradesh and another v. T. Suryachandra Rao, AIR 2005 SC 3110: It is observed that fraud vitiates all transactions known to the law of however high a degree of solemnity is.
4. Hamza Haji v. State of Kerala & Anr., AIR 2006 SC 3028: It was held that the no court would allow itself to be used as an instrument of fraud and no court by way of rule of evidence & procedure allow itself to close its eyes to the fact of it is being used as an instrument of fraud. The principle behind it is that the party which secures the judgement by taking recourse to fraud shall not be enabled to enjoy the fruits of it.

Based on the well-settled principle of law on fraud, the court observes that the appellant has deliberately concealed the information from the assessing officer and CIT (A). The information is well exclusively within the knowledge of the appellant; hence, it is for the appellant to prove that the transaction entered into by him is not a bogus share transaction but a genuine one. Therefore, it is held that it is a fraud committed by the appellant against the assessing officer and CIT (A).

Decision of the Tribunal

The tribunal, when applying the principle of fraud, held that the transaction of purchase & sale of shares of SRK Industries Pvt. Ltd. is a bogus share transaction and is, therefore, void ab initio. It is held that it is a sham and make-believe story with excellent paperwork with the intention of bringing the undisclosed income into the book of accounts. Therefore, the court upheld the order of the assessing officer and CIT (A) and dismissed the appellant’s appeal.

Conclusion

The fraud vitiated the sanctity of proceedings in any case. It not only puts the court on the wrong foot but also vitiates the other party’s rights. The court, in the present case, rightly upheld the order of the assessing officer and CIT (A) while upholding the transaction entered into by the appellant as bogus share transactions. Further, to claim any exemption under clause 38 of Section 10 of the act, all the relevant documents related to the transaction shall be produced to judge the transaction’s sanctity.

Read Our Article: Deletion of Additions Allowed If Transactions are Genuine: ITAT Delhi