Sub : Scrutiny Assessment for the A.Y.2014-15 Show Cause Notice Reg

OFFICE OF THE

INCOME TAX OFFICER-

------No. ITO-/SHOW-CAUSE/2016-17 Date

MOST URGENT

ABC

SHOW-CAUSE NOTICE

Sir,

Sub : Scrutiny assessment for the A.Y.2014-15 – Show cause notice – Reg

*********

Kindly refer to the above.

Please refer to the ongoing scrutiny assessment proceedings for the A.Y. 2014-15.

On perusal of the return of income, statement of computation of total income and details filed during the course of assessment proceeding by your authorized representative, it is seen that the assessee has claimed Exemption u/s. 10(38) of long term capital gain of Rs.7,85,264/-. The working of Long Term Capital Gain shown is as under:

Descripti Sale STT Index Purchase Improve Deduction Adjustme Gain / Loss Exempt on paid cost ment u/s.54 nt u/s.94(7) or 94(8) u/s. 8,28,000 Y N Date 24-5-2011 Nil Nil Nil 7,85,264 7,85,264 112(1) 21.8.2013 Amount 42736 Long Index cost 42736 Term Expenses Nil Capital Index rate 785 Gain 8,28,000 42736 Nil Nil Nil 7,85,264 7,85,264

In connection with the same, you have filed ‘Contract Note cum Bill’ provided by broker for sale of shares of M/s. XYZ

On perusal of details, it is clear that the value of the scrip has gone up multiple times of its purchase price Rs. 25/- per share to Rs. 492.86/- per share in less then two years.

Further, information has been received from Directorate of Investigation and as per the information sent on the ITD, Systems it is revealed that many assessees have taken bogus Long Term Capital Gains (LTCG) from operators, who are doing this business for commission, and that the capital gains arisen on sale of these shares is an arranged and colorful transaction and the transaction made is a penny stock transaction.

The investigation carried out by the Department has proved that a Scheme was hatched by various players to obtain /provide accommodation entry of bogus Long Term Capital Gain through manipulation of stock market. The basic aim of the scheme is to route the unaccounted money of LTCG Beneficiaries into their account/books in the garb of Long Term Capital Gain. This entry of LTCG is taken by selling the shares on the stock exchange and registering the proceeds arising out of the sale of shares into the books as LTCG. For implementing this scheme, shares of some Penny Stock Company are used.

The DGIT (Inv.) wise list of beneficiaries along with all statements have been made available by the Investigation Wing of the Kolkata. Some of the orders passed by SEBI wherein some such penny stock company’s trading has been suspended are available in public domain.

The name of scrip M/s. XYZ. is appearing in the list of Penny Stock, which has been used for generating bogus LTCG, provided by the Investigation Wing of the Department. Since the assessee has dealt in this penny stock, assessee is one of the beneficiaries of accommodation entry for Long Term Capita] Gain. Further, the Operators and Brokers have confirmed in their statements recorded on oath during the course of investigation that they are engaged in fraudulent billing activities and providing the accommodation entries of share bills of purchase and sale entries for commission through a number of Private Limited Shell Companies and some listed Penny Stock Companies. Hence, based on the information received from Investigation Wing and after going through the details filed during the course of assessment proceedings it is observed that the assessee is indulging in non- genuine and bogus capital gains from transaction of sale and purchase of shares of Swift I.T. Infrastructure Pvt. Ltd., 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 fax u/s. 10(38) of the I.T. Act.

From the above facts it is observed that purchases of shares of M/s. XYZ. are bogus with the objective of introducing by manipulating tax free exempt long term capital gains u/s.10(38) of the Act leading to escapement of income from taxation. Hence, the sales in consequence thereof the sham and bogus purchases cannot be accepted as genuine. Since, purchases are held to be bogus and sham, the sale in consequence thereof whereby payments are received through cheque or shares being sold through stock exchange are not of any help to the assessee for claiming the exemption as long term capital gains as the assessee has in collusion with the Brokers has manipulated and camouflaged the entire transactions of sale and purchase of shares in getting issued pre-dated contract notes for purchases of shares and hence these purchases never existed at that relevant time. Hence, the entire sale and purchase of shares were manipulated by the assessee in collusion with the brokers in order to earn tax free exempt long term capital gains on sale of shares u/s. 10(38) of the Act whereby unaccounted cash of the assessee has been introduced in disguise in lieu of safe proceeds of shares. Keeping in view facts and circumstances of the case and as per above discussions and reasoning as set out above, I hold that the claim of exemption of long term capital gain earned on sale of above shares is not allowable.

In view of the above facts, you are requested to show cause as to why exemption claimed u/s. 10(38) of the I.T. Act on the above Penny Stock shall not be rejected and the sale proceeds thereof of Rs.8,28,000/- shall not be treated as unexplained cash credit u/s.68 of the I.T. Act and brought to tax under the head ‘income from other sources' by treating the same as a sham transaction i.e. a transaction which has been manipulated to introduce funds through the LTCG route at ‘Nil’ tax rate.

You are given a final opportunity to file your explanation and the same should reach the undersigned on or before failing which it is will be presumed that you do not any objection for the proposed addition and the assessment will be completed based on material available on records.

Thanking you, Yours faithfully,

I.T.O.