SUNIL GOVIND NAIK,MUMBAI vs. DCIT-41(4)(1), MUMBAI

The NFAC erred in confirming the addition of Rs.7,75,294/- under section 69C as alleged commission expenses without any material evidence of payment or receipt, or identification of the recipient, and solely on conjectures and assumptions. 5. The NFAC erred in making the following erroneous observations to reach conclusion in the present case (Item 6.2.4 on page 37 of the order): "The appellant's explanation that he monitored the company for six quarters and sold it due to declining profits is factually incorrect, as the actual financials demonstrate increasing revenues and profits. This contradiction between the appellant's justification and actual data reinforces the Assessing Officer's conclusion of a prearranged loss-booking exercise." Whereas, the appellant's explanation is factually correct, profits were declining. 6. On the facts and in the circumstances of the case and in law, The NFAC erred in confirming the addition under section 68 as unexplained cash credit although the assessee has incurred huge losses. 7. On the facts and in the circumstances of the case and in law, The NFAC erred in confirming the charging of interest under section 234A and 234B of the Income Tax Act 1961. 8. On the facts and in the circumstances of the case and in law, The NFAC erred in upholding initiation of penalty proceeding under section u/s 271AAC(1) of the Income Tax Act 1961. 9. Appellant craves leave to add, alter, amend or delete any ground of appeal on or before hearing of appeal.” 2. Brief facts of the case are that assessee is Chartered Accountant (CA) filed his return of income for A.Y. 2020-21 on 21.09.2020 declaring income of Rs. 11,07,780/-. Case was selected for scrutiny. During the assessment, the Assessing Officer (AO) noted that on dissemination of data of Income Tax Department, the assessee was found to be beneficiary from trading in shares of Alankit Limited which is a penny stock company. On show cause notice to substantiate such transaction of sale of shares of Alankit Limited, the assessee filed its reply and submitted that his transaction is genuine. He is a Chartered Accountant by profession of all India rank holder having 27 years of experience in India and abroad and worked for 16 years as Chief Executive Officer / Chief Financial Officer (CEO / CFO). The assessee is also SEBI Registered Investment Adviser. He made investment in equity market frequently from last 20 years and focussed on long term wealth creation by investing in various companies. He is not a trader. The investment was made through ICICI Security as stock broker and transaction was carried out through ICICI Bank account. The assessee is dealing in shares from 15 years. The purchase and sale of equity share in Alankit Ltd. resulted in actual loss in genuine transaction. All transactions were carried out through SEBI registered share broking. The digital contract notes and computation of equity capital gain statement was furnished. The assessee submitted that shares were purchased in November and December, 2017 and sold in July and August, 2019. The holding period is for over six quarters. When said company failed to deliver on expected line, he decided to sale such share as there was better opportunity in the market. Though, the shares were increased for more than 50% of weighted average of purchase price thereafter started falling consistently. The reply of assessee was not accepted by AO. The AO was of the view that enquiry reveals that assessee is a beneficiary of bogus long term capital loss on sale of shares of Alankit Ltd. of Rs. 1.10 crore. The AO referred the details of report of Investigation Wing and in para 6 of the assessment order held that Alok Kumar Agarwal had facilitated accommodation entries in the form of bogus long term capital gain / loss to various beneficiaries using scrips of Alankit Ltd. which was earlier known as Euro Finmart Ltd. The AO thereby proposed disallowance of long term capital loss in the draft assessment order. The assessee on receipt of draft assessment order objected for making proposed addition. The assessee in his submission reiterated that his transaction is genuine. He furnished all requisite details to substantiate the genuineness of long term capital loss. The AO not accepted the claim of assessee and disallowed long term capital gain and added the same under section 68. The AO also estimated 8.00% of commission on sale of shares thereby further added Rs. 7,75,294/- while passing assessment order on 22.09.2022 under section 143(3) r.w.s. 144. 3. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee again filed detailed written submission running into thirty pages. The assessee also filed details of purchase and sales of Alankit Ltd, digital contract notes for purchase of shares, bank statement and Demat Account. The assessee also filed copy of show cause notice of draft assessment and his comment against the draft assessment. The ld. CIT(A) after considering the submissions of the assessee upheld that addition under section 68 and 69C. The ld. CIT(A) has given his finding in para 6.1.5 to 6.1.22. The ld. CIT(A) while confirming the action of AO held that assessee has made emphasised on personal credentials, investment philosophy and his clean record which is legally immaterial to the core question. The dispute is whether specific transactions in the scrip of Alankit Limited are genuine or not. The document furnished by assessee is not sufficient to establish genuineness when scrip in question is the subject matter of manipulation scheme. Mere transaction through banking channel or production of contract notes or Demat entries does not automatically entitle the assessee to claim that transactions were genuine if there is convincing material pointing to systematic manipulation, circular trading or accommodation entry mechanisms. The Tribunal and High Courts have held that documentary trail must be examined together with trading patterns, price-volume behaviour, the forensic findings of investigations and other surrounding circumstances, if these indicate a pre-arranged scheme, the fact of banking channel or Demat credit alone cannot rehabilitate the claim. The material with department in this case goes beyond general suspicion. The assessee’s contention about “investment rationale” defence is essentially a subjective explanation. However, objective in fact contradicts the subjective thesis. The contention of assessee that investigation material does not in fact his name or directly connect him with the promoters/operators and cannot be relied. Such argument is misconceived in the legal test. The core question is whether or not the assessee himself organized the manipulation but whether the assessee’s transactions were shown to be part of the larger scheme or that on human probability and surrounding circumstances, they cannot be treated as genuine. In accommodation entry schemes beneficiaries are often insulated from overt links with operators. The ld. CIT(A) disregarded of the written submission and documentary evidences. Further, aggrieved the assessee has filed present appeal before Tribunal. 4. We have heard the submission of learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the Revenue. The ld. AR of the assessee submits that assessee is a Chartered Accountant by profession. He is a regular investor in equity market for 30 years and hold well diversified larger portfolio. Name of which are blue-chip companies. The assessee has earned sufficient dividend income during the relevant period. The total trade value in equity transaction is all about 59 crore which includes sale value of impugned scrip of Alankit Ltd. at Rs. 96.91 lac. During the relevant financial year, the assessee transacted over 40 companies and Alankit Ltd. is one of them. The details of dividend income and assessee’s investment portfolio are placed on record. Entire transactions of assessee including of impugned share are through well-known SEBI broker with ICICI Securities Ltd. which is transacted through ICICI Bank. All the payments were made or received through banking channel. All equity transactions of the assessee are subjected to security transaction tax (STT) paid and was carried through National Stock Exchange or Bombay Stock Exchange. There is not a single off market of transaction in any share including or impugned share. The assessee furnished complete documentary evidences in the form of digital contract notes issued by ICICI securities Ltd., copy of the ICICI Bank account statement evidencing automatic payments and receipts towards purchase and sale of Alankit shares, copy of Demat account (with ICICI Bank) statements reflecting purchase and sale of shares of equity shares including those of Alankit Limited, copies of Broker's Ledger (ICICI Securities Ltd) reflecting all equity transactions including those of Alankit Ltd., STT Paid on equity transactions of Alankit Ltd. is reflected in the Digital Contract Notes, all equity transactions, including those of Alankit Limited, are executed on NSE and BSE as evidenced in Digital Contract Notes. The shares were held for more than one and half years. The AO solely relied upon the report of Investigation Wing in third party matter. Neither the role of assessee nor his broker is mentioned anywhere. The assessee is not connected in any way with the alleged price manipulation. The shares were purchased as well as sold on recognised stock exchange without any human intervention. The AO as well as ld. CIT(A) made certain theoretical comments with pointing any deficiency in the documentary evidences. The AO made addition under section 68 though the assessee has suffered losses. There is no justification or evidence of making addition of unexplained commission @ 8%. The entire addition under section 68 as well as addition of unexplained commission is liable to be deleted. The ld. AR submits that the co-ordinate bench of Mumbai Tribunal on similar set of fact deleted the same addition in the case of Umesh M Shah (HUF) vs NFAC, Delhi in ITA No. 2697 & 2673/M/2024 dated 31.07.2024. The ld. AR of the assessee also relied on various case laws in his written submission. 5. On the other hand, the ld. Sr. DR for the Revenue supported the order of lower authorities. The ld. Sr. DR for the Revenue submits that assessee is a beneficiary of penny scrip long term capital loss. The Investigation Wing of Income Tax Department carried out full-fledged investigation against the penny stock company wherein Alankit Ltd. is one of the penny stock companies which was used for providing accommodation entries of long term capital gain or loss or Alok Agarwal. The ld. Sr. DR submits that appeal may be dismissed by confirming the finding of lower authorities. 6. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that the AO made additions solely on the basis of information available with him. No independent investigation of facts were carried out by him despite the facts that the assessee discharged his onus in providing details of his transaction on sale and purchase of shares of Alankit Ltd. We find that the assessee is regular investor in shares. The assessee is not the sale beneficiary of transaction in the shares of Alankit Ltd. we find that the ld CIT(A) confirmed the action of AO by taking view that the Tribunal and High Courts have held that documentary trail must be examined together with trading patterns, price-volume behaviour, the forensic findings of investigations and other surrounding circumstances, if these indicate a pre-arranged scheme, the fact of banking channel or Demat credit alone cannot rehabilitate the claim. It was held that the material with department in this case goes beyond general suspicion. The assessee’s contention about “investment rationale” defence is essentially a subjective explanation. However, objective in fact contradicts the subjective thesis. The contention of assessee that investigation material does not in fact his name or directly connect him with the promoters/operators and cannot be relied. 7. We find that before AO as well as ld CIT(A), the assessee has furnished complete evidence including contract note of shares, Demat account details, detail of bank account. The lower authorities have not made adverse comment on the various evidences filed by the assessee. The AO or ld CIT(A) has not made any independent investigation of facts to connect the assessee or his broker with the transaction of alleged price rigging. So far as allegation of price rigging is concerned, no role or the activities of the brokers of assessee in price manipulation is brought on record. We find that there is no allegation or adverse finding or report of SEBI about price manipulation by the broker of assessee. The assessee has purchased shares of Alankit Limited through ICICI Brokers Limited. The assessee paid transaction tax on the sales of such shares. Moreover, the assessee was a regular investor in various scrips as has been seen from his portfolio with his broker. The sale of shares was made on BSE platform through SEBI registered broker. It is not the case of AO that the assessee indulged only in the scrips of the share of Alankit Limited. 8. We find that Hon'ble Gujarat High Court in the case of Himani M. Vakil (2014) 41 taxmann.com 425 (Guj) held that where assessee duly proved genuineness of sale transaction by bringing on record contract notes of sale and purchase, bank statement of broker and Demat account showing transfer in and out of shares, AO was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. Gujarat High Court in the case of Parasben Kasturchand Kocher (2021) 130 taxmann.com 176 (Guj), also held that when assessee discharged his onus by establishing that transactions were fair and transparent and all relevant details with regard to transfer furnished to Income Tax Authority and the Tribunal have also took the notice of fact that the shares remained in the account of assessee, the assessee also furnished Demat account and details of bank transaction about the sale and purchase of shares, the addition was deleted. 9. Further, we find of Hon'ble Jurisdictional High Court in the case of PCIT Vs. Indravadan Jain, HUF in Income Tax Appeal No.454 of 2018 dated 12.07.2023 also held that when Assessing Officer nowhere alleged that transactions made by assessee with a particular broker or share broker was bogus, merely because investigation was done by SEBI against the broker or its activities, the assessee cannot be said to have entered into ingenuine transaction. In a recent decision in PCIT Vs Mamta Rajiv Kumar Agarwal (2023) 155 taxmann.com 549 (Gujarat) also held that where the assessee had sold the shares and earned LTCG and the Assessing Officer alleged that transaction was penny stock deal aim at illegitimately claiming LTCG exemption under section 10(38), since there was no allegation on record suggesting the assessee or his broker involved in rigging up the price of scrips, the addition was rightly deleted by Tribunal. We find that assessee made sale of shares through BSE and paid security transaction tax and there is no allegation against the share broker through whom assessee has made sales that they were indulging any price manipulation. Therefore, we do not find any justification in treating the LTCG as unexplained cash credit in absence of any cogent evidence against the assessee specific. 10. We find that while considering the similar scrips i.e. on sale of share of Alankit Ltd, the coordinate bench of this Tribunal in Umesh M Shah HUF Vs NFAC in ITA No. 2697 & 2673 /Mum/2024 dated 31.07.2024 deleted similar additions. We find that similar view was taken by various bench of Tribunal that when the assessee has discharged his primary onus in furnishing complete evidence to substantiate the transaction and the AO neither commented on such evidence nor brought any adverse material on record, the reliance on the third party statement for making addition is not justified. Thus, in view of the aforesaid factual and legal discussions, we do not find any justification in making addition under section 68 on sale of shares of Alankit Limited by disallowing loss. In the result, the ground No. 1 to 3 is allowed. 11. Considering the facts that we have deleted the addition under section 68, therefore addition under section 69C on account of unexplained commission’s expenditure is also deleted. In the result, ground no. 4 & 5 are also deleted. Rest of the grounds of appeal are consequential. 12. In the result, appeal filed by assessee is allowed. Order was pronounced in open court on 03/08/2026 Sd/- Sd/- GIRISH AGRAWAL PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER