SEEMA DHRUVA MALL,GOREGAON vs. DCIT 42(3)(1), MUMBAI

The brief facts of the case are that the assessee is an individual who filed her return of income for the Assessment Year (A.Y.) 2013-14 on 03.08.2013, declaring a total income of Rs. 62,35,730/-. The return of income was initially processed under Section 143(1) of the Act. During the relevant financial year, the assessee undertook transactions in equity shares through SEBI registered stockbrokers and earned Short-Term Capital Gain (STCG) on the sale of listed equity shares of M/s Frontline Business Solutions Ltd. (subsequently known as M/s Maxgrow India Ltd.). The said Short-Term Capital Gain was duly disclosed in the return of income, reflected in the books of account, and supported by documentary evidence.

Subsequently, information was uploaded on the Insight Portal by the Investigation Wing alleging that the scrip of M/s Frontline Business Solutions Ltd. was used for providing accommodation entries in the nature of bogus capital gains. Based on this information, notice under Section 148 of the Act was issued on 31.07.2022 to reopen the assessment. In response, the assessee participated in the reassessment proceedings and submitted comprehensive documentary evidence establishing the genuineness of the purchase and sale of shares.

However, the Assessing Officer (AO) rejected the explanation of the assessee and relied primarily on the generalized reports of the Investigation Wing and third-party statements recorded behind the back of the assessee. The AO passed an order under Section 147 read with Section 144B of the Act on 17.05.2023, treating the total sale proceeds of shares amounting to Rs. 96,80,439/- as unexplained cash credits under Section 68 of the Act and added the same to the total assessed income.

Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A)/NFAC. The Ld. CIT(A), vide order dated 10.12.2025, confirmed the addition of Rs. 96,80,439/- made under Section 68 of the Act.

Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal.

At the outset, Ld. Authorised Representative (AR) appearing on behalf of the assessee submitted before us that the assessee had purchased and sold the shares through a SEBI-registered stockbroker on the recognized platform of the Bombay Stock Exchange (BSE) after due payment of Securities Transaction Tax (STT); the entire chain of transactions is supported by complete documentary evidence, including the Income Tax Return along with computation, Balance Sheet and Capital Account, Working of Short- Term Capital Gains, Contract Notes for purchase and sale, Demat Account Statements showing delivery in and out of shares, Bank Statements reflecting payment for purchase and receipt of consideration through normal banking channels, Broker Client Ledger accounts, and Transaction Confirmation Certificates; the return earned on the investment in M/s Frontline Business Solutions Ltd. was a modest return of approximately 15%, which lacks the characteristic hallmarks of astronomical or rigged returns typically associated with penny stock accommodation entries; the Revenue authorities relied upon third-party statements recorded by the Investigation Wing behind the back of the assessee without providing copies thereof or granting an opportunity to cross-examine such third parties despite specific requests made during the assessment proceedings; and no direct, cogent material or evidence was brought on record by the Revenue to link the assessee with any entry operator, share broker, or price- manipulation scheme.

In support of his contentions, the Ld. AR relied upon various judicial precedents, including:

On the other hand, the Ld. Departmental Representative (DR) heavily relied upon the orders passed by the lower authorities and submitted that the scrip of M/s Frontline Business Solutions Ltd. was an identified penny stock used to create bogus capital gains. The Ld. DR argued that the AO was justified in making the addition under Section 68 based on the findings of the Investigation Wing and surrounding human probabilities.

We have heard both parties at length, perused the material placed on record, and carefully examined the orders passed by the revenue authorities as well as the judicial precedents cited before us.

From a careful consideration of the records, we find that the assessee has produced all necessary primary and secondary documentary evidences to establish the identity, genuineness, and creditworthiness of the share transactions. Specifically, the assessee furnished:

We observe that the Revenue has made the addition under Section 68 of the Act solely based on generalized investigation reports, third-party statements recorded behind the back of the assessee, and alleged suspicion surrounding penny stock transactions. Notably:

It is a settled principle of law laid down by the Hon'ble Supreme Court in Kishinchand Chellaram v. CIT (125 ITR 713) and Andaman Timber Industries v. CCE (Civil Appeal No. 4228 of 2006) that an order passed in violation of the principles of natural justice by relying upon third-party statements without providing an opportunity for cross-examination is legally unsustainable.

Furthermore, suspicion, however strong, cannot take the place of evidence. The Revenue has failed to bring on record any tangible or cogent material directly establishing that the purchase consideration flowed back from the assessee's unaccounted funds or that the assessee was connected with any accommodation entry provider or price manipulator. In the present case, the assessee realized a modest return of approximately 15% on her investment, which further controverts the allegation of rigged capital gains.

The Jurisdictional Hon'ble Bombay High Court in CIT v. Mukesh Ratilal Marolia and CIT v. Shyam R. Pawar [2015] 54 taxmann.com 108 (Bom) has held that where share transactions are supported by contract notes, demat records, and banking channel transactions, the addition under Section 68 cannot be sustained merely on the basis of general investigation reports or third-party statements.

Therefore, respecting the settled position of law and in order to maintain judicial consistency, we hold that the assessee has successfully discharged the burden of proof placed upon her under Section 68 of the Act. The Revenue authorities erred in treating the sale proceeds of Rs. 96,80,439/- as unexplained cash credit. Accordingly, the addition made under Section 68 of the Act is hereby deleted, and the grounds raised by the assessee on merits are allowed.

In the net result, the appeal filed by the assessee is allowed.