CHIRAG BHARAT HUF,MUMBAI vs. ITO WARD 33(1)(1), MUMBAI

The assessee is a HUF and is stated to be engaged in the business of purchase and sale of shares and securities. The assessee filed its return of income for the year under consideration on 12.10.2018 declaring total income of Rs. 15,14,900. Subsequently, a search and survey action was carried out on 19.03.2019 in the case of Shri Naresh Jain by the Investigation Wing, Mumbai. It was stated that Shri Naresh Jain was engaged in providing accommodation entries in the nature of bogus long- term capital gains/losses and other speculative profits/losses through various penny-stock scrips to several beneficiaries across the country. The assessee was alleged to be one of the beneficiaries of such accommodation entries. Proceedings under section 148A of the Income- tax Act, 1961 (“the Act”) was thereafter initiated and an order under section 148A(d) was passed, pursuant to which notice under section 148 of the Act was issued to the assessee. In response to the notices issued by the Assessing Officer, the assessee denied having earned income of Rs. 3,31,27,662. However, according to the assessee, its submissions were not properly considered and the Assessing Officer proceeded to make an addition of Rs. 3,31,27,662 to the returned income.

Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A), National Faceless Appeal Centre, Delhi. Before the learned CIT(A), the assessee submitted that it was a regular trader in shares and securities and had undertaken transactions in more than 1,000 scrips during the relevant assessment year. It was submitted that the five scrips forming the subject matter of the dispute constituted only a small portion of its overall trading activity and that the net gain arising from transactions in the aforesaid five scrips was only Rs. 1,09,030, which had duly been accounted for and offered to tax in the return of income. It was specifically contended that the assessee had neither earned nor claimed any exempt income of Rs. 3,31,27,662 under section 10(38) of the Act and that the said figure had been erroneously adopted by the Department. The learned CIT(A), however, confirmed the addition made by the Assessing Officer, principally on the ground that the gross sale proceeds of Rs. 3,31,27,662 were stated in the search report and that the assessee had not furnished a verifiable reconciliation of the said figure with its books of account. The appeal of the assessee was accordingly dismissed.

Aggrieved by the order of the learned CIT(A), the assessee is in appeal before us and has raised the following grounds of appeal:

At the time of hearing, the learned Authorised Representative (“ld. AR”) submitted that Ground Nos. 1 to 3 were not pressed. Accordingly, Ground Nos. 1 to 3 are dismissed as not pressed.

Ground Nos. 4 to 8 relate to the addition of Rs. 3,31,27,662 made by the Assessing Officer and confirmed by the learned CIT(A). The ld. AR submitted that the assessee is a regular trader in shares and securities and had undertaken transactions in more than 1,000 scrips during the relevant assessment year. It was submitted that the transactions in the five disputed scrips did not result in the alleged exempt income of Rs. 3,31,27,662 and that the net gain arising from these five scrips was only Rs. 1,09,030, which had duly been accounted for and offered to tax in the return of income.

The ld. AR further submitted that the assessee had not declared any exempt income of Rs. 3,31,27,662 in its return of income and that the said figure had been erroneously adopted by the Department. In this regard, the ld. AR referred to the return of income and computation of total income and submitted that no income had been claimed as exempt under section 10(38) of the Act. Specific reliance was also placed on the notice issued under section 148A(b) of the Act, wherein the Assessing Officer had proceeded on the premise that unaccounted money of the assessee had been routed back to its bank account through sale of shares at artificially inflated prices and that the resultant income had been claimed as exempt under section 10(38) of the Act. According to the ld. AR, the aforesaid premise was itself factually incorrect, since the assessee had not claimed any such income as exempt in its return. The ld. AR further submitted that script-wise details of the transactions relating to the five disputed scrips had been furnished before the lower authorities as well as before the Tribunal; the details of which are reproduced as under:-

According to the details furnished, the assessee had incurred losses in respect of three scrips, namely Alankit, EML and Oasis, whereas the remaining two scrips resulted in profits. The ld. AR also took us through the books of account forming part of the paper book and submitted that the transactions were duly recorded therein and were supported by contract notes, bank statements and stock-broker entries.

The ld. AR accordingly contended that the impugned addition had been made on the basis of an erroneous figure adopted from the Investigation Wing report, without examining the actual transactions undertaken by the assessee and the corresponding entries in its books of account. It was submitted that there was no material on record to establish that the assessee had received any accommodation entry or had introduced its own unaccounted money in the guise of share transactions.

The learned Departmental Representative (“ld. DR”), on the other hand, relied upon the orders of the Assessing Officer and the learned CIT(A). The ld. DR submitted that the Investigation Wing had unearthed a modus operandi involving accommodation entries through penny stocks and that the transactions undertaken by the assessee were required to be considered in the light of the information gathered during the investigation. He accordingly supported the addition made by the Assessing Officer and confirmed by the learned CIT(A).

We have considered the rival submissions and perused the material available on record, including the assessment order, the order of the learned CIT(A), the paper book filed by the assessee and the documents referred to during the course of hearing. The controversy before us is whether, on the facts and in the circumstances of the case, the Assessing Officer was justified in making an addition of Rs. 3,31,27,662 on the basis of information relating to alleged accommodation entries in penny stocks, notwithstanding the specific contention of the assessee that the said amount neither represented income earned by it nor was claimed as exempt income in the return of income. On examination of the assessment order, we find that the basis and computation of the impugned addition are not clearly discernible. The assessment order does not contain a proper bifurcation or reconciliation of the figure of Rs. 3,31,27,662. In particular, there is no clear discussion as to the individual transactions which, according to the Assessing Officer, resulted in income of Rs. 3,31,27,662 in the hands of the assessee. There is also no satisfactory explanation in the assessment order as to how the aforesaid figure was arrived at.

In this context, it is important to distinguish between the gross sale consideration arising from a transaction and the income or profit derived there from. A figure representing gross sale consideration cannot, without further examination, be treated as income or profit of the assessee. The Assessing Officer was required to examine the actual transactions undertaken by the assessee and determine the income, if any, arising there from in accordance with the provisions of the Act. Merely adopting a figure appearing in an Investigation Wing report, without establishing that the said figure represented income accruing to or received by the assessee, cannot, by itself, justify the impugned addition. In the present case, the assessee has placed before us the books of account and script- wise details of the transactions in the five disputed scrips. As per the material placed on record, the total sale value relating to the aforesaid five scrips is Rs. 2,69,39,090, as against the figure of Rs. 3,31,27,662 adopted by the Assessing Officer. The assessee has further demonstrated that the net income arising from these transactions was only Rs. 1,09,030.

We find that the books of account and supporting documents placed before us contain details of the relevant transactions and are supported by contract notes, bank statements and stock-broker entries. The assessee has also furnished script-wise details showing the purchase and sale transactions and the resultant profit or loss. Significantly, the Department has not pointed out any specific defect in the books of account or in the supporting documentary evidence so as to establish that the transactions recorded therein were fictitious or otherwise not genuine. We further find that the assessee's contention that it had not claimed any exemption under section 10(38) of the Act in respect of the alleged amount of Rs. 3,31,27,662 is supported by the return of income and computation of total income placed on record. Therefore, the premise that the assessee had earned a large amount of exempt income through penny-stock transactions and had claimed the same as exempt under section 10(38) does not appear to be borne out from the return of income filed by the assessee.

We also find that there is no specific material on record establishing that the assessee was a beneficiary of any accommodation entry allegedly provided by Shri Naresh Jain or any other person referred to in the Investigation Wing report. There is no material brought on record to demonstrate that the assessee had introduced its own unaccounted money in the guise of share transactions or that the sale proceeds credited to its bank account represented accommodation entries. No doubt, information gathered by the Investigation Wing regarding a particular modus operandi involving penny stocks may constitute relevant information warranting examination by the Assessing Officer; however, the existence of such general information cannot, by itself, lead to an automatic conclusion that every transaction undertaken by an assessee in a particular scrip is bogus. There has to be cogent material establishing a nexus between such information and the specific transactions undertaken by the assessee. In the present case, we find that such nexus has not been established. The Assessing Officer has not demonstrated, on the basis of any specific evidence, that the assessee had paid unaccounted cash to any person and, in return, received corresponding sale proceeds through the banking channel. Nor has any material been brought on record to establish that the transactions recorded in the books of account were sham or fictitious.

We are also unable to accept the approach of the lower authorities in treating the figure appearing in the Investigation Wing report as conclusive of the income earned by the assessee. The assessment has to be based upon material pertaining to the assessee and the actual transactions undertaken by it. Where the assessee produces contemporaneous documentary evidence in the form of books of account, contract notes and broker statements, such evidence cannot be brushed aside merely on the basis of a general allegation regarding manipulation of penny-stock transactions. Such evidence has to be examined and, if found unacceptable, rebutted by bringing specific contrary material on record. In the present case, the material placed before us demonstrates that the transactions were duly recorded in the books of account and that the resultant profit or loss was accounted for. The Department has not brought any material on record to disprove the said factual position. On the contrary, the details placed before us indicate that the transactions in three of the five scrips resulted in losses and that the overall net result was a profit of only Rs. 1,09,030.

We further note that the assessee has brought to our notice an order of the Tribunal in its own case for an earlier assessment year, wherein, according to the assessee, similar transactions were examined and relief was granted. We have also perused the said order in ITA No. 8905/Mum/2025 dated 28.04.2026 for Assessment Year 2012-13. As per the said order, the Tribunal recorded a finding that the profits and losses arising from the relevant transactions had been duly disclosed in the financial statements and return of income. While it is a settled principle that each assessment year is a separate unit of assessment and the doctrine of res judicata does not strictly apply to income-tax proceedings, a finding rendered in the assessee's own case on materially similar facts is certainly a relevant consideration, particularly when no distinguishing facts or contrary material have been brought on record by the Revenue.

On an overall consideration of the facts and circumstances of the case, we are of the considered view that the impugned addition of Rs. 3,31,27,662 is not supported by cogent and specific evidence establishing that the said amount represented income earned by the assessee. The figure adopted by the Assessing Officer is not reconciled with the actual transactions recorded in the books of account. Further, the assessee has demonstrated that the total sale value relating to the five disputed scrips was Rs. 2,69,39,090 and that the net result of the transactions was a profit of only Rs. 1,09,030. The assessee has also demonstrated that no exemption under section 10(38) of the Act was claimed in respect of the alleged amount. More importantly, no material has been brought on record to establish that the assessee was a beneficiary of accommodation entries or that the transactions recorded in its books represented bogus or fictitious transactions. In these circumstances, the impugned addition cannot be sustained merely on the basis of suspicion, conjecture or general information regarding the modus operandi adopted in certain penny-stock transactions. Suspicion, however strong, cannot take the place of evidence. In the present case, the material available on record does not establish that the assessee earned income of Rs. 3,31,27,662 during the relevant previous year. We, therefore, hold that the addition of Rs. 3,31,27,662 made by the Assessing Officer and confirmed by the learned CIT(A) is unsustainable and is accordingly deleted.

Ground No. 9 relates to the levy of interest under sections 234A, 234B, 234C and 234D of the Act. Since the substantive addition of ₹3,31,27,662 made by the Assessing Officer has been deleted by us, the consequential levy of interest, if any, under the aforesaid provisions is required to be recomputed in accordance with the income finally determined after giving effect to this order. Accordingly, Ground No. 9 is allowed for statistical purposes

Ground Nos. 1 to 3 are dismissed as not pressed and Ground Nos. 4 to 8 are allowed and Ground No. 9 is partly allowed.

In the result, the appeal of the assessee is partly allowed.