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Facts
The assessee, engaged in trading diamonds, F&O, shares, and commodities, reported business income. The Assessing Officer (AO) made additions for alleged bogus long-term capital gains (LTCG) from penny stocks and a 2% commission paid to entry providers. The assessee claimed these were genuine business transactions.
Held
The Tribunal held that the assessee was a regular investor and provided sufficient documentary evidence to prove the genuineness of the share transactions. The AO's additions were based on suspicion and a general investigation report, not specific evidence against the assessee.
Key Issues
Whether the share transactions were genuine business income or bogus LTCG/commission, and if the AO had sufficient evidence to make additions based on general investigation reports.
Sections Cited
69C, 143(3), 68, 10(38), 253
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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: SHRI PAWAN SINGH & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
These two appeals filed by the Revenue and assessee are against the order of CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide
and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 order no. ITBA/NFAC/S/250/2023-24/1063459384(1), dated 27.03.2024 passed against the assessment order by ACIT-19(2), Mumbai u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 29.12.2017 for AY 2015-16.
2. Grounds taken by Revenue are reproduced as under: 1. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 3,71,253/ u/s 69C of the Income Tax Act, 1961, without appreciating the fact that the Assessing Officer has discussed in details in the assessment order about the modus operandi unearthed by the Investigation Wing which clearly established that such bogus transactions of penny stock of M/s. Thyrocare Pvt Ltd were pre- Arranged by Operator of Exit Provider who Charge a commission for the same ? 2. Whether on the facts and circumstances of the case and in law the CIT(A)has erred in deleting the addition of Rs. 3,71,253/ u/s 69C of the Income Tax Act, 1961 being a 2% unexplained commission paid to brokers for converting the unaccounted income of the beneficiaries into legitimate income under the garb of exempt LTCG without paying any taxes by sale of penny stock shares, while confirming the addition on account of alleged LTCG for sale of penny stock shares as bogus which is interlinked with each other ? 3. Whether on the facts and circumstances of the case and in law the CIT(A)has erred in deleting the addition of Rs. 3,71,253/ u/s 69C of the Income Tax Act, 1961 being a 2% unexplained commission paid to brokers for converting the unaccounted income of the beneficiaries into legitimate income under the garb of exempt LTCG without appreciating the fact that AO has relied upon the report of investigation wing wherein, it is stated that during the course of search/survey action, it was admitted by the exit/entry provider that commission in cash was charged for providing accommodation entries for the purpose of making/providing bogus LTCG.? 4. In this case the tax effect involved is Rs. 1,26,188/-, which is below the monetary tax limit of Rs. 50,00,000/- However, the issue in this case is the commission and Exit providers paid to Brokers on transactions for earned fictitious long Term Capital Gain/Loss on sale of Penny Stock, which falls under exception clause laid down vide CBDT Circular No 23 of 2019 Dated. 06.09.2019.r.w. Circular 05 of 2024, Dated. 15.03.2024. Hence, the appeal u/s 253 of the I. T. Act, 1961 is recommended to be filed before Hon'ble ITAT. 2.1. Grounds taken by assessee are reproduced as under: 1. The Learned Commissioner of Income-tax (Appeals) erred in holding that the purchase and sale of shares of a particular company by the appellant is and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 ingenuine by relying on the general investigation report by Directorate of Investigation, without even providing the report if any, issued by the Director of Income Tax (Inv.) 2. The learned Commissioner of Income-tax (Appeals) faield to appreciate that the appellant's had offered the profits from sale of shares as business income and not claimed exempt as long term capital gains under section 10(38) 3. The Learned Commissioner of Income-tax (Appeals) erred in making addition of INR 1,85,62,668/? U/s 68 of the IT Act, 1961 to the declared income without appreciating the facts of the case 2.2. In the two appeals, one by the assessee and another by the revenue, grounds raised are different however, relate to one common transaction. Therefore, both the appeals are taken up together for adjudication. Since the assessee expired, legal heir is brought on record for which revised Form 36 are furnished and which are part of the appeal folder. We first take up appeal by the assessee in ITA No. 4329/Mum/2024.
Brief facts of the case are that assessee is engaged in business of dealing and trading diamonds. He has also reported business income on account of transactions in Futures and Options (F&O), shares and commodities. In the computation of total income under the head profits and gains of business of profession, assessee reported business income from three different sources with net business income of Rs. 80,15,256/-. Assessee filed his return of income of 29.10.2015 reporting total income at Rs. 88,87,930/-. In the course of assessment proceedings, ld. AO noted from profit and loss account relating to F&O transactions that assessee had adjusted profit of Rs. 1,77,66,660/- on sale of shares of one company named EINS Edutech Ltd (formerly known as Thyrocare limited) alleged to be a penny stock, against loss incurred in other F&O transaction, thereby declaring net loss of Rs. 2,96,981/- in the F&O segment of his business.
and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 3.1. He noted that holding period of the script was from 08.12.2014 to 23.12.2014 which was sold for a consideration of Rs. 1,85,62,668/- with a quantity of 4,62,500 no. of shares. Ld. AO alleged that assessee has earned profit on sale of these shares and adjusted the same against the loss incurred in other share transactions. According to him, this huge profit on sale of shares is dubious based on investigation carried out by the department. In this respect, he noted that Kolkata investigation directorate of the department had undertaken investigation into various penny stocks and had given detailed finding indicating bogus long term capital gain (LTCG)/short term capital loss (STCL) entries claimed by a large number of beneficiaries. By referring to the said investigation, he further noted that basic aim of this dubious scheme was to route unaccounted money of beneficiaries into their books of accounts in the garb of LTCG/STCL. He thereafter, explained the modus operandi for the accommodation entries. Assessee furnished his detailed replies including documentary evidences to justify that the profit earned by it on sale of shares of EINS Edutech Ltd is genuine which has already been duly offered to tax as business income.
3.2. In the statement recorded of the assessee in the course of assessment various questions were asked in relation to the segment of business carried by him for F&O transactions and trading in shares. Ld. AO has reproduced the statement in his order in paragraph 14 of the impugned assessment order wherein he notes that “assessee conceded that he is not a frequent trader of shares and he does not know anything about the script Thyrocare”. On perusal of the questions and answers in the statement recorded as reproduced in the impugned assessment order, it is found that assessee has been investing in shares for quiet some years which he started trading in shares from AY 2010- 11 as mentioned in answer to question no.
He also explained about
and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 the purchase of shares of EINS Edutech Ltd which was not on account of preferential allotment but from the open market. In question no. 13, he explained that investments are made based on recommendation of broker and information available in leading newspapers. In question no. 12, he also submitted and explained about his familiarity with trading in shares. He stated that transaction of shares purchase and sale are carried out on time basis based on his stock brokers recommendations. He further stated in answer to question no. 23 that investments are made on long term basis and according to the advice of brokers. No third party is involved either directly or indirectly. Ld. AO proceeded based on preponderance probably test and concluded on an adverse finding to treat the amount of Rs.1,85,62,668/- received by the assessee as sale proceeds on sale of the shares unexplained cash credit u/s. 68.
3.3. He made further addition of Rs. 3,71,253/- by taking 2% of the above amount as commission paid to the entry provider and treated it as unexplained expenditure u/s. 69C. Assessment was thus, completed against which assessee went in appeal before the ld. CIT(A), who confirmed the addition made by the ld. AO of Rs. 1,85,62,668/- in respect of sale proceeds of shares. However, he deleted the addition made towards commission amounting to Rs. 3,71,253/- for which revenue is in appeal in ITA No. 2571/Mum/2024.
Before us, ld. Counsel for the assessee reiterated the facts and made detailed submissions by referring to paper books in two volumes along with compilation of case laws, all of which are placed on record and have been perused. Ld. DR also made his submissions by placing reliance on the orders of the authorities below and siting the judicial precedents in the case of Suresh Asrani vs ITO in dated 24.04.2023.
and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 5. We have heard both the parties and perused the material on record. We have also given our thoughtful consideration to the submissions made by both the parties. The undisputed fact on record is that assessee is engaged in the business with multiple sources of earning business income including F&O transactions and trading in shares as well as commodities. Assessee did not claim exemption u/s. 10(38) on account of profit earned on sale of shares of EINS Edutech Ltd as it was his business profit and not LTCG. Ld. AO throughout, the assessment proceeding has based his analysis and observations considering the transaction for earning LTCG, whereby he alleged that assessee is engaged in taking benefit of accommodation entry by arranging LTCG through entry providers. For this ld. AO had heavily relied on the investigations carried out by the department to explain the modus operandi of arraigning such accommodation entries by way of LTCG/STCL.
5.1. Assessee had purchase 46,250 shares of EINS Edutech Ltd in June 2013 through its broker Aengus Power Infra Limited. After a holding period of 17 to 18 months from the date of purchase, these shares were sold after stock split in December, 2014 against which assessee booked profit of Rs.1,77,66,660/- which has been duly reported as business income, subjected to tax.
5.2. This taxable profit on sale of shares was set off against a loss of F&O transactions. To support his case, assessee submitted documentary evidences which include: i. Contract notes for sale of shares ii. Copy of ledger account of broker iii. Bank statement for the movement of funds iv. DMAT account statement 5.3. Assessee referred to ledger account of ‘profit/loss on dealing in F&O transactions’ placed in the paper book, to demonstrate these set of fact. Ld. Counsel in the course of hearing referred to the decision of co-ordinate bench of ITAT Kolkata in the case of Chandra Prakash Jhunjhunwala [2020] 113 taxmann.com 246 (Kol), whereby transactions in the script of EINS Edutech Ltd was dealt with and it was held to be a genuine transaction after taking note of the order passed by Security Exchange Board of India (SEBI). Relevant paragraph in this respect are extracted below for ready reference:
“(3) EINS EDUTCEHLTD. (Now Aplaya Creations Ltd.) (i) Copy of purchase bill dated 10.08.2013, reflecting the purchase of 50,000 shares of EINS Edutech Ltd. from Neptune Financial Advisory Pvt. Ltd. (Paper Book Page No.7); (ii) Copy of Bank Statement reflecting the debit transaction of the amount of Rs. 8,00,000/-paid for the purchase of shares by cheque no. 37644 on 01.08.2013 (Paper Book Page No. 10) (iii) Copy of statement of DEMAT account evidencing the debit of shares of EINS Edutech Ltd. on 01.12.2014, 02.12.2014, 06.12.2014, 11.12.2014 and so on; (Paper Book Page No. 63) (iv) Copy of Contract Notes evidencing the sale of shares of EINS Edutech Ltd.; (v) Copy of bank statement reflecting the transactions of sale of shares of EINS Edutech Ltd (Paper Book page No. 59-61). Therefore, by submitting these plethora documents and evidences, the id Counsel for the assesse claimed that long term capital gain (LTCG) earned in respect of the scrips, namely: Kailash Auto Finance Ltd. Lifeline Drug & Pharma Ltd, and Eins Edutceh Ltd. (Now Aplaya Creations Ltd.) are genuine. We also note that the Securities Exchange Board of India (SEBI) also declared these scrips and shares as genuine and the interim order passed by the SEBI was revoked by SEB1 itself, vide its order SEB1/WTM/MPB/EFD-DRA-1/31/2017 dated 21.09.2017 (page nos. 69-84). Assessee's name is at 5.N. 154 (at page no. 80) read with para 7 of Page no.
Hence, we note that since these shares/scrips were traded on the platform of recognized stock exchange and the Securities Exchange Board of India (SEBI) did not give any adverse report therefore, long term capital gain arise or earned by the assessee should be genuine and it should not be bogus by any stretch of imagination. Moreover, the assessing officer did not doubt on the documents and evidences as noted by us above. The assessing officer mainly made addition based on suspicion, and and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 probability. As we have noted that in the course of assessment proceedings, all the relevant details and documents requisitioned by the ld. Assessing Officer in notice u/s 142(1) was filed before him. The assessee has submitted the details of LTCG, copy of contract notes, bank statements, allotment advise, copy of bills, DEMAT account and other necessary details before AO and the AO failed to bring any cogent evidence on record to show that these documents and evidences were false and untrue.
We would like to mention some important salient features of the LTCG transaction entered into by the assessee, which is given below: (i) The assessee is a regular investor in shares and securities as evident from past assessment records. (ii) The shares were purchased and sold through a Registered Broker named "Eureka Stock & Share Broking Services Ltd." in the Stock Exchange. (iii) The shares were purchased and sold based on the prevailing market condition. (iv) The purchase and sale of shares are supported by contract notes. The payments were received through proper banking channel. (v) The purchase and sale transactions were subjected to Security Transaction Tax, Service Tax, Brokerage charges and Stamp duty. (vi) The share purchase and sale transactions are reflected in the D-mat account. (vii) The purchase of shares (Investments) was not disputed in earlier year, where assessment is completed u/s. 143(3) of the Income Tax Act. (viii) These facts are verifiable from the regular books of accounts. (ix) The transactions can also be verified from the Stock Exchange. (x) The SEBI has cleared these shares and scrips from the allegation of Market Rigging. Hence, the genuineness of the transaction cannot be doubted.” 5.4. Reference was also made to decision of Co-ordinate Bench of ITAT Mumbai, in the case of ITO vs Fairdeal Infin Services Private Limited [2025] 173 taxmann.com 517 (Mum), wherein it was held on similar fact pattern that: “Where Assessing Officer disallowed business loss claimed by assessee on ground that said transactions were sham and part of manipulated transactions involving bogus LTCG and STCL, since Assessing Officer had placed reliance on investigation report which was a generalized report and had not brought any material on record to show that transactions entered by assessee were found to be a part of manipulated transactions, impugned disallowance of loss was unjustified.” 5.5. We have gone through the judicial precedents relied upon by ld. AR in the case of Suresh Asrani (supra). From its perusal, we note that the said decision is ex-parte with none appeared on behalf of the and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 assessee. Hence, in our considered view, the same would not apply in the present case. It is noted that addition has been made, based on general investigation undertaken by the department and the findings are not specific to the assessee. No cogent material has been brought on record by conducting examination to demonstrate and establish connection of assessee for carrying out alleged manipulative transactions. Assessee has explained his understanding of the business undertaken by him, in the segment of F&O transactions and trading in shares in the statement which was recorded by ld. AO in the course of assessment proceedings.
Conclusion drawn by ld. AO in para 14 about assessee conceding is contrary to the statement given by assessee so recorded. Also, there is nothing on record in respect of any report of SEBI to demonstrate any involvement of assessee in respect of alleged transaction. Ld. AO has placed heavy reliance on the doctrine of pre-ponderous of human probability to hold that assessee is indulged in bogus and dubious share transactions. It is worth noting that before drawing adverse conclusion, ld. AO deliberated on the general modus operandi of such transactions as well as background of investigation carried out by the department. It is also noted that, entire flow of transactions undertaken by the assessee are corroborated by relevant documentary evidences placed on record as already listed above. While making the addition, there are no discrepancies pointed out by the ld. AO in these documents and details furnished by the assessee. Ld. AO did not bother to discuss or point out any defect or deficiency in the documents so furnished by the assessee. These evidences furnished have neither been controverted by the ld. AO during assessment proceedings nor anything substantive brought on record to justify the addition made by him.
and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 6.1. At any stage of the present case, revenue has not brought on record any material about participation of the assessee with any such dubious transactions with relating to accommodation entry, price ragging or exit providers. To our mind, ld. AO could have taken an adverse view only if he could point out the discrepancies or insufficiency in the evidence and details furnished in his office. Once the assessee has produced the documentary evidence to established the veracity of his claim, the burden would shift on the revenue to established its case.
6.2. From the perusal of records, it is discernible that ld. AO had proceeded on the basis of analysis of the financials of the company. According to him, sharp movement in the share prices of the aforesaid scrip is not justified. He has relied upon the search and survey operations conducted by the investigation wing of the Department at various locations in respect of alleged penny stock which sets out the modus operandi adopted in the business of providing entries for bogus capital gains. The conclusion drawn by the ld. AO of implicating the assessee is un-supported by any cogent material on record. The finding arrived at by the ld. AO is thus, purely an assumption, based on conjectures and surmises. In our thoughtful considerations on the facts and circumstances of the case, it is not in controversy that assessee has discharged the burden by submitting relevant documents, details of which are already extracted above, forming part of the paper book.
6.3. Further, assessee is a regular investor since year 2010-11 with investment in shares of other companies as affirmed by him in the statement recorded by the ld. AO in the course of impugned assessment. From the perusal of the statement of assessee recorded by the ld. AO during the course of assessment, it is demonstrated that he is a long-term investor and is aware of his DMAT account, brokers through whom transactions were undertaken, shares in which he had and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 invested and stock market operations. He produced all the relevant documentary evidences in the assessment proceedings before the ld. AO in support of his deposition in the statement so recorded.
From all of this, we notice that assessee has – a. purchased the shares in the open market by making payment through banking channel. b. dematerialized the shares purchased by credit to the DMAT account and later sold out of this holding. c. sold the shares on the platform of recognised stock exchange on the then prevailing prices. d. received the sale proceeds through stock market process in his bank account.
7.1. We note that ld. AO has not brought on record any material to show that assessee was part of any group which was involved in the manipulation of share prices. Suspicion by the ld. AO on the purchase and sale of shares is baseless. As already noted above, ld. AO has referred to the theory of preponderance of probability which according to us is applied to weigh the evidence of either side and draw a conclusion in favour of a party which has more favourable factor in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumption of fact that might go against the assessee. Once nothing has been proved against the assessee with the aid of any direct material, nothing can be implicated against the assessee on the presumption or suspicion, howsoever, strong it might appear to be true.
7.2. Considering totality of facts and circumstances of the case, factual matrix and submissions of parties narrated as well as discussion and observations made herein above, we delete the addition made u/s 68 and 4329/Mum/2024 Pravin Mohanlal Selvadia AY 2015-16 towards proceeds of sale of listed shares of EINS Edutech Ltd. which have been reported by the assessee as business profits, there being no claim of exemption u/s. 10(38). Accordingly, grounds taken by the assessee in this respect are allowed.
Addition made by the ld. AO on estimate basis towards commission for arranging alleged accommodation entry @2% amounting to Rs.3,71,253/- is consequential to the addition made towards receipt of sale proceeds of alleged penny stock. Since we have deleted the said addition towards sale proceeds of alleged penny stock in terms of above stated observations and findings, this consequential addition of commission has no foundation to stand. Accordingly, the finding arrived at by the ld. CIT(A) in this respect who deleted the same is upheld. Grounds taken by the Revenue in this respect are dismissed.