NEELESHKUMAR RADHESHYAM LAHOTI ,MUMBAI vs. INCOME TAX OFFICER WARD 32(2)(1), MUMBAI

This appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for the assessment year 2018-19, arising out of the assessment order passed under section 147 read with sections 143(3) and 144B of the Income-tax Act, 1961 (“the Act”).

The effective grounds raised by the assessee challenge the confirmation of addition of ₹49,92,041 representing the sale proceeds of shares of M/s Sunstar Realty Development Ltd. The assessee contends that the transactions were carried out through a recognised stock exchange and through banking channels and that no material was brought on record to establish that the assessee was a beneficiary of any accommodation entry.

Briefly stated, the assessee filed the return of declaring total income of ₹18,57,720 on 23.08.2028. The assessment was reopened based on information received from the INSIGHT portal regarding fictitious profit in equity/derivative trading in the shares of M/s Sunstar Realty Development Ltd., which was identified as a penny-stock company. During the assessment proceedings, the assessee submitted that he had purchased 50,000 shares of the said company on 21.08.2017 and sold the same on 28.08.2017. The assessee thereafter purchased another 74,493 shares on 29.08.2017, out of which 36,412 shares were sold on 04.09.2017 and the remaining 38,081 shares were sold on 05.09.2017. The assessee incurred an overall short-term capital loss of ₹22,674 from these transactions and disclosed the same in the return of income. The Assessing Officer, relying upon the investigation conducted in the case of the said company and the statement of its promoter, treated the entire sale consideration of ₹49,92,041 as unexplained short- term capital gain and added the same to the income of the assessee. The learned CIT(A) confirmed the addition.

The learned Authorised Representative submitted that all the shares were purchased and sold on the recognised stock exchange within a short period and the transactions were supported by contract notes, demat records and banking documents. The assessee had not claimed any exempt long-term capital gain under section 10(38) of the Act. On the contrary, the transactions had resulted in a short-term capital loss of ₹22,674, which was duly disclosed in the return of income. It was submitted that the statement of the promoter relied upon by the Assessing Officer neither referred to the assessee nor established any cash transaction between the assessee and any alleged entry provider. Merely because the shares were described as penny stock, the genuine purchase and sale transactions carried out on the stock exchange could not be disregarded.

The learned Departmental Representative relied upon the orders of the lower authorities and submitted that the investigation conducted by the Department established that the shares of M/s Sunstar Realty Development Ltd. were used for providing accommodation entries.

We have heard the rival submissions and perused the material available on record. The assessee purchased and sold the shares within a short period through the recognised stock exchange. The first lot of 50,000 shares purchased on 21.08.2017 was sold on 28.08.2017. The second lot of 74,493 shares purchased on 29.08.2017 was sold on 04.09.2017 and 05.09.2017. The aggregate result of these transactions was a short-term capital loss of ₹22,674, which was disclosed by the assessee in the return of income. Thus, this is not a case where the assessee acquired shares at a nominal price, held them for a considerable period and thereafter claimed an abnormal and exempt long-term capital gain under section 10(38) of the Act.

The addition has substantially been made on the basis that M/s Sunstar Realty Development Ltd. was identified as a penny-stock company and its promoters were allegedly engaged in providing accommodation entries. However, no material has been brought on record demonstrating that the assessee paid any cash or unaccounted consideration to the promoter, broker or any exit provider. The statement relied upon by the Assessing Officer does not contain any specific reference to a transaction entered into by the assessee. There is also no material establishing any connection between the assessee and the persons alleged to have manipulated the price of the shares. General findings recorded during an investigation in the case of a company cannot, in the absence of any specific evidence against the assessee, justify treating the assessee’s entire sale proceeds as undisclosed income.

We further find that the Assessing Officer treated the entire sale consideration of ₹49,92,041 as unexplained short-term capital gain without giving credit for the corresponding cost of acquisition, even though the assessee had disclosed the purchase as well as the sale of the shares and the transactions had resulted in a loss. The characterisation of the entire sale consideration as short-term capital gain is, therefore, contrary to the manner in which capital gain is required to be computed. Once the transactions are supported by the stock- exchange records, contract notes, demat entries and banking channels, the same cannot be rejected merely on the basis that the scrip was subsequently identified as a penny stock, unless cogent material is brought on record connecting the assessee with the alleged accommodation-entry arrangement.

In view of the foregoing, we are unable to sustain the addition of ₹49,92,041. The Assessing Officer is directed to delete the same and accept the short-term capital loss of ₹22,674 disclosed by the assessee, subject to verification of its arithmetical correctness. Accordingly, the grounds raised by the assessee are allowed.

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