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

Briefly stated, the facts of the case are that the assessee is an individual and a resident of India. For the Assessment Year 2012-13, the assessee filed her return of income on 30.07.2012 declaring a total income of Rs. 18,07,289/-, which was processed under section 143(1) of the Act. Subsequently, based on information received from the Directorate of Investigation, Mumbai, in connection with alleged penny stock transactions in the scrip of M/s VMS Industries Ltd. via the Naresh Jain Group, the Assessing Officer ("AO") formed a belief that income chargeable to tax had escaped assessment. Accordingly, notice under section 148 dated 30.03.2019 was issued. In response, the assessee filed a return of income on 18.04.2019 declaring the same income as originally returned.

During the reassessment proceedings, the AO noted that the assessee had sold shares of M/s VMS Industries Ltd. during the previous year and received a total sale consideration aggregating to Rs. 41,79,800/-. The AO alleged that these transactions formed part of an accommodation entry arrangement involving entry operators. Consequently, the AO treated the entire sale consideration of Rs. 41,79,800/- as unexplained cash credit under section 68 of the Act, ignoring the fact that the assessee had already disclosed a Short Term Capital Gain (STCG) of Rs. 11,46,500/- on the said transactions. Additionally, the AO estimated commission expenditure at 2% of the transaction value and made an addition of Rs. 83,596/- under section 69C of the Act.

Aggrieved, the assessee preferred an appeal before the learned CIT(A). The learned CIT(A) dismissed the appeal and upheld the additions made by the AO. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

Before us, the learned Counsel for the assessee submitted that all share purchases and sales were carried out through a SEBI-registered stock broker on the floor of a recognized stock exchange via normal banking channels, with applicable Securities Transaction Tax (STT) duly paid. The shares were credited and held in the assessee's Demat account. The learned Counsel drew our attention to the complete documentary evidence placed on record, including contract notes, demat statements, broker ledger accounts, and bank statements showcasing the clear trail of transactions.

The Ld. Counsel further strongly contended that the AO relied entirely on third-party statements recorded behind the back of the assessee (specifically of Shri Naresh Jain) without providing a copy of the complete statements or granting an opportunity for cross-examination, despite specific requests. It was further submitted that the revenue failed to establish any direct nexus or cash trail linking the assessee to any price-manipulation syndicate, and thus, the additions were based purely on conjectures, suspicions, and surmises.

On the other hand, the Ld. Departmental Representative (DR) heavily relied upon the orders of the lower authorities and submitted that M/s VMS Industries Ltd. is a documented penny stock used for providing accommodation entries. Therefore, the lower authorities were fully justified in treating the transactions as sham.

We have heard the rival submissions, perused the material on record, and gone through the judicial precedents cited by both sides. We find that the entire case of the Revenue rests upon the investigation report and third- party statements recorded by the Investigation Wing. However, it is an admitted fact that despite specific requests made by the assessee during assessment proceedings, neither the complete copies of the adverse statements relied upon were provided, nor was an opportunity for cross- examination afforded to the assessee. This is a clear violation of the principles of natural justice as settled by the Hon'ble Supreme Court in the case of Kishinchand Chellaram vs. CIT (125 ITR 713).

Furthermore, we observe that the assessee has produced overwhelming contemporaneous documentary evidence to prove the genuineness of the transaction. The purchases and sales were executed through a registered stock broker on the floor of the Bombay Stock Exchange (BSE), payments/receipts were routed through banking channels, and the shares were duly reflected in the Demat account. The Revenue has not pointed out any specific defect or discrepancy in these documents, nor has it disproved their authenticity. The AO has also committed a fundamental fallacy by taxing the entire sale proceeds as unexplained cash credit under section 68, while failing to appreciate that the transaction resulted in a modest return of roughly 15% over an identified cost of acquisition (Rs. 30,25,000/-), out of which STCG of Rs. 11,46,500/- was already declared and offered to tax by the assessee.

A perusal of identical matters concerning the same scrip (M/s VMS Industries Ltd.) before co-ordinate benches of this Tribunal—such as Kashyap M. Vora (HUF) v. ITO (ITA No. 3394/MUM/2024) and Jitendra Sharma, ACIT v. Shri Kashyap Mahesh Vora (ITA No. 4322/Mum/2024)—reveals that additions made under sections 68 and 69C have been deleted where the AO failed to conduct independent inquiries, failed to establish a direct nexus between the assessee and the entry operators, and relied solely on generalized investigation wing reports.

Since the facts in the present appeal are identical, and the Revenue has failed to bring any direct material on record to demonstrate any collusion, price rigging, or an established cash trail linking the assessee to the alleged entry operators, the addition sustained by the Ld. CIT(A) under section 68 cannot be legally maintained. Consequently, the addition of Rs. 83,596/- under section 69C towards estimated commission expenditure, being purely consequential in nature, also fails to survive. Accordingly, we direct the AO to delete both the additions.

The legal grounds challenging the reopening are left academic.

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