INCOME TAX OFFICER, WARD-20(3)(1), MUMBAI vs. RAJENDRA DHANJI DEDHIA, MUMBAI

PER SANDEEP GOSAIN, JUDICIAL MEMBER:

These appeals have been filed by the Department against the order of the Ld. NFAC vide DIN: ITBA/NFAC/S/250/2025-26/1080647351(1) dated 12-Sep-2025 for the Assessment Year 2014-15 and ITBA/NFAC/S/250/2025-26/1080647169(1) dated 12-Sep-2025 for the Assessment Year 2015-16.

I have gone through the above submissions of the Appellant and have considered the facts and evidence on record. In the present case the appellant filed the return of income for the assessment year 2014-15 on 30/06/2015 declaring total income at Rs. 2152970/-. Later AO completed the assessment by assessing total income at Rs. 25032838/- by disallowing the LTCG of Rs 21939294/- claimed exempt u/s 10(38) of the Income Tax Act, 1961 and addition towards commission of Rs. 1096964 and added back towards his taxable income under section 69 of the Income Tax Act, 1961. Penalty proceeding u/s 271(1)(c) of the Income Tax Act, 1961 were initiated for furnishing inaccurate particulars of income with a view to concealment of income. Being aggrieved by the same the appellant preferred instant appeal.

The AO stated that as per working of long term capital gain attached with return of income, he has shown gain of Rs. 21215251/- on sale of shares during the year which has been claimed exempt u/s 10(38) of the Income Tax Act, 1961. This quantum of huge long term capital gain was found suspicious and detailed investigation of this issue was undertaken. Various tools available were examined including ITD data, BSE data, money control website, court rulings, interact as well as investigation wing report and findings of the SEBI. The AO stated that after analysis and due examination of records, it was found that long term capital gain of Rs. 6,92,46,360/- shown in the return as the sale of shares of 'Excel Castronics Ltd' was pre-arranged method employed by the appellant in connivance with operators to evade taxes. The scrip was purchased in month of January, 2012 and was sold in the month of March 2014. M/s 'Excel Castronics Ltd' Total 2000000 shares were bought on 28/01/2012 at the face value of Rs(10) per share. Out of the above 88720 shares sold from December 2013 to March 2014 at the BSE to various entites for a total sale of Rs. 21939294/- resulting into long term capital gain of Rs. 21215251

All the financial details of company for the relevant period were verified. Balance sheet, profit and loss account, trading pattern of this scrip in share market and financial analysis of this scrip was undertaken. This company was having market price of share at around Rs. 7.27 for the share having face value of Re 1 in February, 2012. Thereafter, the price was jacked up to Rs. 455/- from Rs 7.27/- in 26 months that is till June 2014. Thus, within in 26 months the price was jacked up nearly 1100 times. After that the price was maintained in the range of Rs. 7.27/- on 18/8/2014. So that the interested beneficiaries were able to book the long term gains. After that the price was made to fall freely so that interested beneficiaries who had booked at high market price can avail bogus short Term Capital Loss. Thereafter the prices have gone down to merely Rs.7.27/-.

Even though the networth of the company and the business activity of the company is negligible the share prices have been artificially rigged by the group of operators including Shri Amit Ashokbhai Pala of Mumbai to accommodate beneficiaries seeking long term capital gain and losses. No prudent businessman and particularly trader or investor in stock will invest in such penny scrip which is defunct and inoperative.

Kolkata Investigation Directorate had undertaken investigation into 84 penny stocks and has given detailed findings indicating bogus LTCG/STCL entries claimed by large number of beneficiaries. The modus operandi involving operators, intermediaries and the beneficiaries has been detailed in the investigation report prepared and disseminated by the Kolkata Directorate. Similar investigations were also conducted by the Directorate of Investigation at Mumbai and Ahmedabad. The basic aim of this dubious scheme was 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 Companies were used. The same modus is adopted for providing accommodation entry of bogus LOSS. In this scheme, the shares of the penny stock companies are acquired by the beneficiaries of LTCG at very low prices through the route of preferential allotment (private placement) and off market transaction. These shares have a lock-in period of 1 year as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. Another route to acquire the shares is through Amalgamation or merger. In this route, the beneficiaries of LTCG are allotted shares of a private limited company which is subsequently amalgamated with a listed penny stock and the beneficiaries receive shares of the listed penny stock in exchange of the shares of private limited company. The shares in some cases were acquired through stock exchange. These shares were then split and bonus shares were issued to increase the volume. Thereafter, the prices of the shares of the penny stock companies are rigged and are raised through circular trading. This is managed by the "operator" of the scrip.

Once the period of 1 year has passed and the share prices have been sufficiently rigged, the beneficiaries sell their shares at the inflated prices on the Stock Exchange. A point worth noticing here is that the purchase of the shares is not made by the public but by the bogus entities managed and controlled by the promoter of the penny stock company or the operator which are referred to as "Exit Providers'. The unaccounted money of the beneficiaries is routed to these bogus entities "Exit Providers" and the shares held by the beneficiaries are bought by these bogus entities from the money which is the unaccounted money of the beneficiaries. Sometimes, the shares of the LTCG beneficiaries are purchased by the beneficiaries of LOSS who later sell their shares when the price falls and hence book bogus LOSS in their books.

During investigation in the case of Amit Ashokbhai pala who was working with sampati financial private limited, whose one of the director Jayesh Madiayar and is located in at 301-302, B wing Imperial Height, 150 feet ring road Rajkot, (Same at Excel Castronics Limited) comforted in his statement u/s 131 (1A) , that he was working their till 2015 and Shri Jayesh Madiyar traded in Excel castronics Limited in his name the payment was also done buy Jayesh Madiyar.

The AO stated that the appellant resorted to a preconceived scheme to procure long-term capital gains by way of price difference in share transactions not supported by market factors. The order of SEBI has also given the similar finding that the prices of the shares were determined artificial by manipulations and cannot be a product of market factors and commercial principals, Failure of Assesses to discharge his onus, Ignorance of the appellant about shares and penny stock companies, Cash trail in the accounts of the entry providers, the transactions entered by the appellant involve the series of preconceived steps, the performance of each of which is depending on the others being carried out. The appellant stated that in response to the notices issued by the AO he had furnished the complete details and evidence including contract note for purchase and sale of shares, demat account, Bank statement, Global Report, Broker Ledger etc. in respect of Long Term Capital Gain which has been claimed exempt under section 10[38] of Income Tax Act, 1961. He has also requested for the cross verification of the persons on whose statement the AO was relying for making addition. The appellant further stated that the AO has not referred to any tangible material, which has came into his possession, based on which, he has came to the conclusion that income has escaped assessment. When the allegation of the investigation wing is that the appellant has received bogus entries of LTCG is not a correct or cogent reason to believe that the Appellant has taken bogus entry has been routed through the said broker. The report of the Directorate of Investigation wing, Kolkata, has been accepted by the Assessing Officer, without independent application of mind. No reference has been made to any material gathered by the investigation wing, either by way of statements or by way of bank statement/evidences etc. There is no prima facie material, to take a prima facie view that the appellant’s has been benefited in any way via bogus entry. Under the above circumstances, the reasons recorded for reopening in our view does not stand the tests laid down for sustaining the reopening. AO has not verified the transactions and in a mechanical manner without verification of records had issued notice under section 148 of the Income Tax Act, 1961. It can be safely concluded that the reopening has been done on the basis of information available with the Investigation Wing, without any base or verification of records and therefore liable to be quashed. In none of the Investigation, he has been named as either operator or accused of converting black money into white. No other evidence except the above reports which itself are general in nature [ not pointing out at the appellant in particular] was available with the Assessing Officer to reject his claim in respect of Long Term Capital Gain. There are no circumstantial as well as direct evidence against him to prove that, Long Term Capital Gain shown is not natural one but arranged one. There is no mention as to how has he connected the scrip investigated by Kolkata Directorate and that he is an accommodation entry beneficiary.

HIGH COURT OF GUJARAT in case of Commissioner of Income-tax-I Vs. Himani M Vakil [2013]10 taxmann.com 326 (Gujarat) held that where assessee duly proved genuineness of share transactions by bringing on record contract notes for sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, Assessing Officer was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. Appellant had furnished the complete details and evidence including contract note for purchase and sale of shares, demat account, Bank statement, Global Report, Broker Ledger etc. in respect of Long Term Capital Gain which has been claimed exempt under section 10[38] of Income Tax Act, 1961. In case of DCIT vs SUNITAKHEMA in ITA nos 714 to 718/ kol/2011 Tribunal at Kolkata has held that : The AO cannot treat a transaction as bogus only on the basis of suspicion or surmise. He has to bring material on record to support his finding that there has been collusion/connivance between the broker and the assessee for the introduction of its unaccounted money. A transaction of purchase and sale of shares, supported by Contract Notes and demat statements and Account Payee Cheques cannot be treated as bogus.

HON’BLE DELHI HIGH COURT in the case of I.T. A.125/2020, I.T.A. 130/2020 and I.T.A.131/2020 has dismissed the appeal of ITAT stating that, Court has to decide an issue on the basis of evidence and proof and not on suspicion alone. The theory of humanbehavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the respondent. It was further held by Court that, reliance placed on SumanPoddar vs. ITO and SumatiDayal vs. CIT is of no assistance and held that this case is quite different from the factual matrix at hand. Similarly, the case of SumanDayal vs. CIT [Supra] too turns on its specific facts. It was held that there cannot be addition without any cogent material on record. Statements relied by the Assessing Officer in the assessment proceedings were not recorded by the Assessing Officer but they were preexisting statements recorded by the Investigation Wing and the same cannot be sole basis of assessment without conducting proper enquiry and examination during the assessment proceedings itself. In our humble opinion, neither the Assessing Officer conducted any enquiry nor has brought any clinching evidence to disprove the evidences produced by the assessee. The report of the Investigation Wing is much later than the dates of purchase / sale of shares and the order of the SEBI is also much later than the date of transactions transacted and nowhere SEBI has declared the transaction at earlier dates as void. The order dated 21/09/2017 passed by the Securities and Exchange Board of India under section 11, 11[4] and 11B of the Securities and Exchange Board of India Act, 1922 in the matter of Kailash Auto Finance Ltd has been revoked the order passed by them on various dates against the various appellant and others with immediate effect. Para 5 of the order which is reproduced here under:

“Pursuant to the interim order, SEBI conducted a detailed investigation into the role of various entities in price manipulation in the scrip of Kailash Auto so as to ascertain the violation of securities laws. Upon completion of investigation by SEBI, investigation did not find any adverse evidence/adverse findings in respect of violation of provisions of the PFUTP Regulations in respect of the following 244 entities (against whom directions were issued vide the interim order and/or conformity orders) warranting continuation of action under section 11B r/w 11(4) of the Act. The details of the 244 entities are as follows”

Thus, the SEBI has taken a back foot in the matter and therefore the addition made on the basis of enquiry by SEBI is liable to be quashed as the very basis on which the addition has been made is revoked. Kolkata Tribunal in DOLARRAI HEMANI vs. ITO (ITAT Kolkata) I.T.A No. 19/Kol/2014 vide order dated 02.12.2016, held that the fact that the stock is thinly traded and there is unusually high gain is not sufficient to treat the long- term capital gains as bogus when all the paper work is in order. The revenue has to bring material on record to support its finding that there has been collusion / connivance between the broker and the assesse for the introduction of its unaccounted money.

High Court of India in the case of PCIT v. PARASBEN KASTURCHAND KOCHAR [130 taxmann.com 176 of 2020] held that : 1. This appeal under Section 260A of the Income Tax Act, 1961 (for short 'the Act 1961") is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench dated 20-2- 2020 in the ITA No.549/Ahd/2018 for the A.Y. 2014 15. The Revenue has proposed the following question of law for the consideration of this Court: "Whether the Appellate Tribunal was right in law and on facts in deleting the addition of Rs.9,70,468/- made on account of LTCG claimed as exempt u/s. 10(38) of the Act without appreciating the fact that the transaction was pre- arranged as well as sham and was carried out through penny scripts companies / paper companies?" 2. We take notice of the fact that the issue in the present appeal is whether the assessee earned long term capital gain through transactions with bogus companies. In this regard, the finding of fact recorded by the Tribunal in paras 9, 10 and 11 reads thus: "9. In our considered opinion, in such case assessee cannot be held that he earned Long Term Capital gain through bogus company when he has discharged his onus by placing all the relevant details and some of the shares also remained in the account of the appellant after earning of the long term capital gain.

ITA No. 7213/Mum/2025

Order pronounced in the open court on 13.08.2026.

Sd/- Sd/- BIJAYANANDA PRUSETH SANDEEP GOSAIN ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai Dated: 13.08.2026 RY-SrPS

Copy to: INCOME TAX OFFICER, WARD-20(3)(1),, 306, 3RD FLOOR, PIRAMAL CHAMBER, 1 PAREL, MUMBAI-400012, MAHARASHTRA RAJENDRA DHANJI DEDHIA, 3 PLOT NO.50, KRISHNA BLDG, 2 R.A.KIDWAI ROAD, KING CIRCLE, MUMBAI., MUMBAI-400019, MAHARASHTRA 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE