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Facts
The assessee claimed Long Term Capital Gains (LTCG) exempt under Section 10(38) on the sale of shares of Moryo Industries Ltd. (MIL). The Assessing Officer (AO) rejected this claim, treated the gains as unexplained cash credit under Section 68, and made an addition. The AO's action was based on an investigation wing report suggesting a modus operandi of generating bogus LTCG through penny stock manipulation.
Held
The Tribunal held that the assessee had discharged the initial onus by providing documentary evidence of share purchase and sale through banking channels and recognized brokers. The SEBI had also found no adverse findings against the assessee. The Tribunal noted that the AO relied on a generalized investigation report without substantiating how the assessee was involved in manipulation. Decisions of higher courts and coordinate benches on similar issues were also relied upon.
Key Issues
Whether the LTCG earned from the sale of penny stock shares is to be treated as bogus and added under Section 68, or if the assessee has discharged the onus to prove the genuineness of the transactions.
Sections Cited
143(3), 147, 10(38), 68, 69C, 133A, 133(6), 11(1), 11(4), 28(i)
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Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
per share market fundamentals wherefrom it was found that Long Term Capital Gain (LTCG) of Rs.1,67,52,500/- shown in the return as sale of shares of Moryo Industries Ltd. was prearranged method employed by the Assessee in connivance with operators to evade taxes. The Assessing Officer (AO) also observed that SEBI has made the investigation in the case of operators and by passing an order u/s 11(1) & 11(4) of the Act restrained 99 entities from accessing the secondary stock market and further in buying, selling and dealing in securities in any manner whatsoever till further order. Whole transactions and a series of steps were taken to accomplish such share transactions in an integrated manner and with a view to ascertaining the true nature and character of such purchase and sale of shares and considering the findings of the search/survey, enquiries conducted in the case of Assessee, brokers, operators and the entry providers and the nature of transaction entered into by the Assessee, the claim of exemption as claimed by the Assessee u/s 10(38) of the Act is disallowed and the amount of Rs.1,67,52,500/- is added in the taxable income of the Assessee u/s 68 of the Act". 3. The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner, however, could not get succeeded as the Ld. Commissioner more or less on the similar reasons as given by the AO for making the addition, ultimately affirmed the addition. 4. The Assessee, being aggrieved, is in appeal before us. 5. We have heard the parties and perused the material available on record. It is not in controversy that the Assessee had purchased the aforesaid shares on 10.11.2012 by making the payment through banking channel/cheque and subsequently got dematerialized the same in the month of January 2013 and sold the same in the month of February 2014 through recognized stock exchange. The Assessee in response to the notice dated 06.05.2016 u/s 142(1) r.w.s. 129 of the Act and in order to establish the genuineness of its claim, has submitted the copy of allotment letter of shares, bank statements highlighting the payment made for purchase of shares and received on sale of shares, copy of broker ledger, copy of contract notes and copy of Dmat statement etc. Admittedly the AO has not doubted the such relevant documents filed by the Assessee in support of his transaction qua shares, which goes to show that the Assessee has discharged his initial onus cast as cast upon him as per section 68 of the Act to prove the transaction and to substantiate his claim. 5.1 We further observe that the AO doubted the transaction mainly on the basis of investigation carried out by the investigation wing as well as SEBI report/action. Whereas it is a fact as highlighted by the Ld. Counsel Ms. Hema Sharma, CA by drawing our attention to pages No.41-50 of the factual paper book filed before us that the SEBI vide order dated 21.09.2017 has revoked ad-interim order dated 04.12.2014 wherein certain entities were restrained from carrying out activities of the shares, purchases etc. It is an admitted fact as not refuted by the Ld. D.R. that Shri Yash no action has either been taken by the SEBI against the Assessee and no incriminating material was found against the Assessee. Even otherwise directly or indirectly, no role has been assigned to the Assessee qua rigging of the shares and/or any manipulation in the scrip under consideration.
5.2 We further observe that the Hon'ble Jurisdictional High Court in the case of Pr. CIT vs. Indravadan Jain HUF 454 of 2018 (Bom-HC) dated 12.07.2023 has also dealt with almost identical addition as involved in the instant case and by considered certain facts and circumstances, laid down certain principles by observing and holding as under: "JUDGEMENT 1. The following question of law is proposed: "Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was Justified in deleting the addition of Rs.1,03,33,925/- made by AO u/s 68 of the I.T. Act, 1961, ignoring the fact that the shares were bought/acquired from off market sources and thereafter the same was demated and registered in stock exchange and increase in share price of Ramkrishna Fincap Ltd. is not supported by the financials and, therefore, the amount of LTCG of Rs. 1,03,33,925/- claimed by the assessee is nothing but unaccounted income which was rightly added u/s 68 of the I. T. Act, 19617"
We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd. ("RFL") is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax ("STT") has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL 3. Therefore, we find nothing perverse in the order of the Tribunal.
Mr. Walve placed reliance on a judgment of the Apex Court in Principal Commissioner of Income-tax (Central)-1 vs. NRA Iron & Steel (P.) Ltd. 2019 (103) taxmann.com 48 (SC). but that does not help the revenue in as much as the facts in that case were entirely different.
In our view, the Tribunal has not committed any perversity or applied Incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.
6. The appeal is devoid of merits and it is dismissed with no order as to costs." 5.3 We further observe that the Hon'ble Jurisdictional High Court in the case of Pr. CIT vs. Ziauddin A Siddique (ITA No.2012 of 2017 decided on 04.03.2022) has also dealt with the identical addition. 5.4 We also observe that the co-ordinate Bench of the Tribunal at Mumbai in the cases of ITO-19(2)(4) vs. Prakashmal Malraj Jain (ITA No.3271/M/2023 decided on 12.08.2024) and Jagdish B. Prajapati (HUF) vs. ACIT-24(2) (ITA No.548/M/2019 decided on 17.06.2021) also A.Y. 2014-15 Devang Bhupendra Shah considered the identical scrip as involved in the instant case and ultimately on the identical facts, deleted the addition laid down certain principles/confirmed the deletion of the addition. 5.5 On the aforesaid analyzations, in our considered view, the Assessee has been able to discharge his prima-facie onus as cast u/s 68 of the Act by producing the relevant documents. The Assessee was also not involved in any rigging of the shares/scrip under consideration and even otherwise no adverse order as on date is against the Assessee by any of the investigation authority or SEBI and therefore, considering the peculiar facts and circumstances referred above in totality, we are inclined to allow the claim of the Assessee u/s 10(38) of the Act by deleting the addition under consideration. Thus, the claim of the Assessee u/s 10(38) of the Act is allowed and addition is in hand is deleted.
In the result, the appeal filed by the Assessee stands allowed.
On careful consideration of all the relevant facts of the case and we notice that the assessee had purchased the shares from the market in physical form, got it transferred to his name and later dematerialised the same. The payment for purchase of shares was made through banking channels. Later, the assessee had sold the shares in the stock exchange platform through a registered broker and received the sale consideration through banking channels after holding the same for more than 500 days. The assessee has furnished copy of demat statement, which shows entry and exit of the shares. Neither the ld.CIT(A) nor the AO have not found fault with any of the documents furnished by the assessee evidencing the purchase and sale of shares. Further, the AO has also not carried out any independent enquiry with regard to the transactions carried on by the assessee, i.e., he has simply relied upon the generalised report given A.Y. 2014-15 Devang Bhupendra Shah by the Investigation wing. The SEBI report which was also one of the important evidence of price rigging etc. subsequently gave a clean chit to the assessee. Therefore, it also lost its evidentiary value.We notice that the AO has primarily placed reliance on the report given by the Investigation Wing of the Income-tax Department, Kolkata in order to arrive at the conclusion that the Long Term Capital Gain reported by the assessee is bogus in nature. We notice that the investigation report prepared by Investigation Wing, Kolkata is a generalized report with regard to the modus operandi adopted in manipulation of prices of certain shares and generation of bogus capital gains. We notice that the AO has placed reliance on the said report, without bringing any material on record to show that the transactions entered by the assessee were found to be a part of manipulated transactions, it was not proved that the assessee has carried out the transactions of purchase and sale of shares in connivance with the people, who were involved in the alleged rigging of prices.
Considering the above discussion, the facts on record and the legal position emerging out of catena of decisions of Hon’ble Supreme Court, jurisdictional High Court and direct decisions rendered by the co-ordinate benches of Mumbai, ITAT order, we hold that the addition made by the AO u/s 68 of the Act in the year under A.Y. 2014-15 Devang Bhupendra Shah consideration is devoid of any merit. The claim of the assessee u/s 10(38) of the Act has been made based on facts which could not be rebutted by the AO. The documentary evidences could not be rejected without bringing on record any substantial piece of evidence and just on the basis of certain individuals who also were not produced for cross examination of their stated stands. Moreover, the jurisdictional High Court decisions cited supra are on identical facts as also the co- ordinate benches of Mumbai tribunal have a binding precedence. None of them could be distinguished by the ld.CIT(A) anywhere in the appellate order. Apparently,he has in a preconceived manner dittoed the assessment order rather than by way of independent application of mind. We have no hesitation in deleting the addition. The AO is, therefore, directed to delete the additions made u/s 68 of the Act. The addition on account of alleged payment of commission u/s 69C of the Act would consequently stand deleted. Thus, we allow all the grounds of appeal of the assessee.