SUNDER VISHAN LAKHANI ,MUMBAI vs. ASST. COMMISSIONER OF INCOME TAX CIRCLE 15(2)(1), MUMBAI

आयकरअपीलीयअिधकरण�ायपीठमुंबईम�। IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY, JM & SHRI ARUN KHODPIA, AM I.T.A. No.4958/Mum/2025 (Assessment Year: 2017-18) Sunder Vishan Lakhani Asst. Commissioner of Income Tax Gokul Bunglow, Plot No.117, A Circle 15(2)(1), Mumbai Room No.357, 3rd floor, Aayakar Lane, Sector 8, Vashi, Navi Vs. Mumbai-400703 Bhavan, Maharishi Karve Road, Mumbai-400020 PAN: ABTPL9772E Assessee- अपीलाथ� / Appellant Revenue -��थ�/ Respondent :

Assessee by : Ms. Ritika Agarwal, Adv. : Shri Tushar Mohite – SR. DR. Revenue by : 01.04.2026 Date of Hearing : 29.06.2026 Date of Pronouncement

O R D E R Per Arun Khodpia, AM: This present appeal is filed by the assessee against the order of Commissioner of Income Tax Appeals/ National Faceless Appeal Centre, Delhi [in short, “the Ld. CIT(A)”] dated 09.06.2025 for the assessment year 2017-18 arises from assessment order u/s 143(3) of the Income Tax Act, 1961 (“the Act”) dated 26.12.2019 passed by Assistant Commissioner of Income Tax Circle 15(2)(1), Mumbai (in short, “Ld. AO”). The grounds of appeal are as under: “1.BECAUSE the CTT(A) has erred in law and on facts in upholding the addition of 33,14,181/- made u/s. 68 of the Income Tax Act. 1961, by denying exemption us. 10(38), despite the Appellant having furnished plethora of documentary evidence to establish

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani the genuineness of the long-term capital gain arising from sale of shares of M/s. RK Manufacturing Company Ltd. 2. BECAUSE the CIT(A) has failed to appreciate that the shares were duly purchased through banking channels in A.Y. 2015-16, bonus shares were duly allotted, and the same were sold through a SEBI-registered broker via a recognised stock exchange, with STT duly paid. 3. BECAUSE, the CIT(A) failed to appreciate that while the AO accepted the genuineness of the purchase of the shares in question in AY 2015-16, the AO inconsistently treated the subsequent sale of the same shares as bogus without any cogent basis, simply by relying on third-party investigation report. 4. BECAUSE the CIT(A) has erred in law and on facts in confirming the addition by merely relying upon general information and allegations contained in a third-party investigation report, which was never provided to the Appellant, thereby violating principles of natural justice. 5.BECAUSE the CIT(A) failed to consider that no independent inquiry was conducted by the AO to rebut or disprove the evidences filed by the Appellant. 6. BECAUSE, the CTT(A) has failed to appreciate that the AO has relied upon a purported statement recorded by the Investigation Wing, without independently examining the same or establishing any nexus with the Appellant's case. 7.BECAUSE, the CIT(A) has failed to appreciate that the AO did not provide the Appellant with a copy of the so-called material/statement relied upon, nor was any opportunity of cross-examination afforded to the Appellant during the assessment proceedings; and even the CIT(A) failed to direct the AO to supply the said material/statement and provide an opportunity of cross-examination, thereby violating the principles of natural justice. 8. BECAUSE the finding that Metropolitan Stock Exchange of India (MSEI) is not a recognised stock exchange is factually and legally incorrect, as MSEI is duly recognised under section 4 of the Securities Contracts (Regulation) Act, 1956 and satisfies the condition under section 10(38) of the Income Tax Act 9.BECAUSE, the CIT(A) has wrongly relied on general court decisions from unrelated cases, without considering the specific facts, evidentiary record, and judicial precedents filed by the appellant in support of his case.”

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani Company Ltd. for Rs.33,14,181/- was claimed. The revenue has noticed that under an organized racket to generate bogus entries of long-term capital gains/long-term capital loss in penny stock, the subjected scrip of M/s. RK Manufacturing Company Ltd. was also found involved in such activities. The assessment thereafter was completed concluding that the addition of Rs.33,14,181/- by denying the claim of exemption u/s 10(38) of the Act treating the same as unexplained cash credit u/s 68, the total income of assessee has been determined at Rs.48,11,871/-. 3. The assessee preferred an appeal before the Ld. CIT(A) against the aforesaid addition made by the AO, wherein the Ld. CIT(A) observed that in view of various decisions, the addition deserves to be confirmed despite the fact that the outer logic in the form of fulfillment of requisite conditions for eligibility of exemption u/s 10(38) stood satisfied. Inference was drawn on consideration of financials of the company whose shares gave rise to astronomical profits which cannot be explained as normal phenomena defying all logics, reasons and profitability. Such coincidences of selection of shares of a lesser known company with weak financial records by an investor who does not have a regular track record of investment in shares, at the time when share prices are at rock bottom, then selling the shares at the precise instant when share prices have peaked after specific period and peaked without any rhyme and reason and thereafter started to fall from peak immediately after the transfer, it is difficult to consume so many coincident unless the element of manipulation is perceived. Although the form is 3

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani confirmatory, the substance contained in the transactions is founded either on absurdity or the swing of a magic wand. Ld. CIT(A) confirmed the addition made by the Ld. AO while making an amendment in amount of addition to Rs. 33,05,631/- instead of 33,14,181/-. 4. Being dissatisfied with the aforesaid confirmation of addition by the Ld. CIT(A), assessee preferred to follow remedial action by filing an appeal before the Tribunal which is under consideration before us in the present matter. 5. At the outset, Ld. AR representing the assessee submitted that the assessee has transacted in the shares of M/s. RK Manufacturing Company Ltd. during the year under consideration and had made the payment of purchase of shares through banking channel and also sold the shares through banking channel. A copy of transaction and holding statement is shown to us, placed at page no.32 of the assessee’s paper book, according to which assessee has invested in number of shares amounting to Rs.13,200/-.The ledger account of M/s. Dhaval Finance showing therein a payment of Rs.1,45,618/- is placed in the Assessee’s PB. 6. It is submitted by the Ld. AR that the assessee has purchased 2,400/- shares of M/s. RK Manufacturing Company Ltd. on 09.06.2014 by an offline transaction through broker of M/s. Dhaval Finance,Jamnagar for a total consideration of Rs.1,45,618/-. The said payment was made through banking channel. Thereafter M/s. RK Manufacturing Company Ltd. has issued 10,800 bonus shares on 09.08.2014. Accordingly, the assessee held 13,200 shares as on

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani 31st March, 2015 and 31st March, 2016 and such entries were duly reflected in assessee’s balance sheet for those years. 7. During the assessment year 2017-18, the assessee sold all 13,200 shares at Rs.262/- and Rs.261/- for quantities 8,100 and 5,100 respectively through a registered broker M/s. RK Stockholding (P.) Ltd. on the Metropolitan Stock Exchange of India via exchange mechanism and reported Long-Term Capital Gain of Rs.33,14,181/-. The Ld. AO rejected assessee’s claim u/s 10(38) and added the entire amount of transaction u/s 68 for Rs.33,14,181/-. Ld. CIT(A) also decided the issue with some corollary without independently evaluating the substantial documentary evidence placed on record by the assessee. The assessee, aggrieved by the said order, has preferred the present appeal. 8. Ld. AR submitted that the assessee has furnished various documentary evidences to support the genuineness of the transactions, the list of such documents are as under: (a) Broker's note dated 09/06/2014 issued by M/s. Dhaval Finance confirming offline purchase of 2,400 shares; (b) Extract of bank statement of the Assessee reflecting payment of Rs.1,45,618/- to M/s. Dhaval Finance through banking channel; (c) Share certificates issued by M/s. R K Manufacturing Company Ltd. for 13,200 shares (post bonus); (d) Balance sheets for 31/03/2015 and 31/03/2016 reflecting shareholding; (e) Ledger account in the books of the Assessee for the period 01/04/2014 to 31/03/2016; (f) Transaction and holding statement issued by M/s. R K Stockholding (P.) Ltd. for FY 2016-17; (g) Contract notes of sale of 13,200 shares on MSEI; and (h) Confirmation of accounts from M/s. Dhaval Finance. 9. It is further submitted that the Ld. AO did not rebut/contradict or find any infirmity in the aforesaid documents. There was no finding that these documents 5

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani are fabricated, forged or unreliable. Ld. AR placed his reliance on various decisions and has furnished the summary of findings which are culled out as under: “8. ITO, Ward-33(1)(3), Mumbai vs Chhaya Ketan Mehta, ITA No. 6543/MUM/2025, order dt. 09.03.2026 The hon'ble ITAT, Mumbai allowed the assessee's appeal and deleted the addition of Rs. 75,16,570/- made u/s 68 in respect of LTCG from sale of shares of SRK Industries Ltd. The Tribunal observed that the assessee had furnished complete documentary evidence including contract notes, demat statements, bank statements and proof of payment of securities transaction tax (STT), and the AO had not pointed out any defect in these documents. Further, the said scrip involving similar transactions has been considered in favour of the respective assesses on identical facts and circumstances. Accordingly, the LTCG were held to be genuine and AO was directed to grant exemption u/s 10(38) of the Act. Relevant paras: 6, 6.1 9. ITO-19(2)(2) vs Meher Anoop Malani, ITA No. 4337/Mum/2023, order dt. 17.05.2024 The hon'ble Tribunal while relying upon another case involving same scrip allowed the appeal holding that the assessee had carried out the transactions through recognized stock exchanges and registered brokers using banking channels, with shares held in a demat account and STT duly paid. It was further observed that the assessee had furnished complete documentary evidence such as contract notes, demat statements and bank records, and no discrepancy was pointed out by the AO. Accordingly, since the AO failed to bring any cogent evidence to prove that the transactions were bogus, the hon'ble Tribunal upheld the order of the CIT(A) deleting the addition of Rs.26,78,488/ made u/s 68 in respect of LTCG from sale of shares of VAS Infrastructure Ltd., along with the consequential commission addition. Relevant paras: 7,8 10. SindhumatiRamavtar Pathak vs ACIT-32(3), ITA No. 4914/MUM/2025, order dt.24.12.2025 The hon'ble Tribunal noted that the assessee had furnished complete documentary evidence such as purchase records, demat statements, contract notes, and bank statements showing that the shares were purchased through banking channels, dematerialized, and sold on a recognized stock exchange after holding them for more than 30 months. It also observed that part of the shares were still held by the assessee and no allegation of manipulation was established by SEBI or any investigation agency. Relying on several coordinate bench decisions and High Court rulings involving the same scrip, the hon'ble ITAT held that the AO had relied merely on investigation reports and suspicion without bringing any direct evidence against the assessee.

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani Accordingly, the hon'ble Tribunal deleted the additions and allowed the assessee's appeal. Relevant paras: 9, 10, 11 11. Jayesh Sojpar Karnia HUF vs ITO Ward 30(1)(5), ITA No.4034/M/2023, order dt. 01.05.2025 The AO had treated the transaction as a penny stock arrangement based mainly on investigation reports and abnormal price rise in the scrip. The hon'ble Tribunal noted that the assessee had purchased the shares through banking channels, received shares pursuant toamalgamation, dematerialized them, and sold them through a recognized stock exchange with sale proceeds received through banking channels. It was observed that the assessee hod furnished contract notes, demat statements, bank bank records and other documentary evidence to substantiate the genuineness of the transactions. The hon'ble Tribunal further held that the AD failed to bring any direct evidence linking the assessee with price manipulation or accommodation entries. Accordingly, gly, the hon'ble Tribunal deleted the additions and allowed the assessee's appeal. Relevant paras: 5, 6, 7 12. DCIT-19(1), Mumbai vs Pavankumar Bachhraj Chandan, ITA 2592/MUM/2023, order dt. 18.02.2025 The Tribunal observed that the assessee had furnished complete documentary evidence including share allotment records, demat statements, contract notes, and bank statements showing that the shares were purchased through banking channels and sold on a recognized stock exchange with STT paid. It further noted that the AD failed to establish any direct nexus between the assessee and alleged price manipulation or accommodation entry providers. The ITAT also relied on coordinate bench decisions in the assessee's own case for the earlier year and other judicial precedents involving the same scrip. Accordingly, the Tribunal upheld the deletion of additions and dismissed the Revenue's appeal. Relevant paras: 7,8 13. CIT v. Shyam R. Pawar (2015) 54 taxmann.com 108 (Bom. HC): 3.3 "Thus, considering the aforesaid facts and circumstances of the case, as the Ld. Commissioner not only examined the relevant documents filed by the Assessee before the AO as well as before the CIT(A) but also analysed the peculiar facts and circumstances in totality in context of the case in hand and the relevant judgments as applicable to the instant case and then only came to the clear cut finding for allowing the claim of the Assessee u/s 10(38) of the Act and consequently deleted the addition under consideration. Thus, we are of the considered view that the order passed by the Ld. Commissioner need no interference, as the same is neither suffers from any perversity, impropriety nor illegality. Thus, the same is upheld." 9. CIT v. Odeon Builders Pvt. Ltd. (2019) 418 ITR 315 (SC):

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani "Thus, the entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant, thus denying opportunity of cross examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques, & VAT Registration of the sellers & their Income Tax Return. In view of the above discussion in totality, the purchases made by the appellant from M/s Padmesh Realtors Pvt. Ltd. is found to be acceptable and the consequent disallowance resulting in addition to income made for Rs.19,39,60,866/-, is directed to be deleted." 10. Pr. CIT v. Ziauddin A. Siddiqui (2016) 389 ITR 0001 (Bombay HC)/Income-tax Appeal No. 2012 of 2017, dated 4-3-2022: "We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd. ("RFL") is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax ("STT") has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL. Therefore we find nothing perverse in the order of the Tribunal." 11. PCIT v. Krishna Devi [2021] 126 taxmann.com 80 (Delhi HC): The Hon'ble Court noticed that the reasoning given by the Assessing Officer to disbelieve the capital gain declared by the assessee, viz. astronomical increase in the price of shares, weak fundamentals of the relevant companies, are based on mere conjectures.” 10. Regarding the authenticity of Metropolitan Stock Exchange of India Limited (MSEI), it is submitted that as per the website of SEBI, under recognized stock exchange at Sr. No.3 MSEI is recognized u/s 4 of Securities Contracts (Regulation) Act, 1956. The SEBI has recorded its recognition in March, 2026 valid upto September 15, 2026. It is further submitted that the investigation report which was relied for denial of exemption u/s 10(38) was never provided to the assessee. The statement of broker, promoter or entry operators purportedly

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani recorded by the investigation wing was also never shared with the assessee, who was thus deprived of opportunity to rebut the same or seek cross-examination. 11. This is a clear violation of principle of natural justice. The assessee placed his reliance on the decision of Hon’ble Supreme Court in the case of KishanchandChellaram v. CIT (1980) 125 ITR 713 (SC), wherein the Hon’ble Court has held that material adverse to the assessee cannot be used against it without being put to him. It is also submitted that a sum found credited in the books of assessee has been duly offered for tax and through explanations about the nature and source of credit, the sale proceeds of shares held in demat account and sold through exchange mechanism. A complete paper trail from purchase to holding to sale has been established by documentary evidence, the pre-conditions for invoking section 68 are not met by the Ld. AO. It is also submitted that the Ld. AO has not brought on record any material to show that the documents produced by the assessee were fabricated or forged, that the assessee made in all the books, cash payments or that the direct nexus existed between the assessee and the alleged manipulation of share price or the assessee was a beneficiary in the so-called arranged Long-Term Capital Gain scheme. 12. The Ld. AO merely relied on the general investigation report of Director of Investigation, Kolkata which describes a general modus operandi. This report has not been specifically applied to the facts of the assessee’s case. In terms of aforesaid submissions, the assessee’s prayer is as under:

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani “20. Having regard to the totality of facts and circumstances, the documentary evidence on record, the statutory position, and the preponderance of judicial authority on the subject, we are of the considered opinion that: (i) The Assessee has duly discharged the burden of establishing the genuineness of the share transaction from purchase to sale; (ii) The AO and the CIT(A) have erred in making/sustaining the addition of Rs.33,14,181/- under section 68 of the Act; (iii) MSEI is a recognised stock exchange for the purposes of section 10(38) of the Act, and the Assessee's LTCG on the sale of shares on MSEI is entitled to exemption under section 10(38) of the Act; (iv) The addition being unsustainable, the consequential penalty under section 271AAC also cannot be sustained.” 13. Per contra, Ld. DR vehemently supported the orders of Revenue Authorities. 14. We have considered the rival submissions, perused the material available on record and case laws relied upon by the assessee. Admittedly, the assessee has entered into a transaction of shares in a particular scrip namely, M/s RK Manufacturing Company Ltd. wherein the assessee has purchased shares through offline transaction on 09.06.2014. Further, the assessee was issued bonus shares on 09.08.2014, accordingly the total quantity of shares with assessee became 13,200 (2,400 + 8,100). On the basis of information received from investigation wing, the Ld. AO has invoked provisions of section 143(3) and had initiated the scrutiny assessment in the case of assessee. The impugned transaction of shares had completed with a Long-Term Capital Gain of Rs.33,14,181/-, which was claimed as exempt u/s 10(38) of the Act. 15. To substantiate the claim which was doubted by the Ld. AO, the assessee furnished various documents such as broker note, extracts of bank statements, 10

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani share certificates, balance sheet, ledger account transaction and holding statement, contract notes of sale and confirmation of accounts from M/s. Dhaval Finance. The Ld. AO did not make any adverse inference towards the documents neither had conducted any enquiry to establish that the transaction was not genuine. The transaction from offline mode cannot be disregarded in entirety as the same was paid through banking channel. In entire proceedings, there was no allegation against the assessee that the assessee was involved in any price rigging of the bogus scrip. In assessee’s paper book, a copy of bank statement is also submitted showing therein a payment of Rs.1,45,618/- to M/s. Dhaval Finance for which the M/s. Dhaval Finance has issued 2,400 shares, which is evident from the Debit Note No. 217 dated 09.06.2014. 16. Further, the assessee has sold the stock through RK Stockholding Private Limited, a SEBI Registered agent. Since nothing adverse has been observed against the assessee in present case, apart from the modus operandiby the accommodation entry providers, who have used M/s. RK Manufacturing Company Limited also as a tool for accommodation entries, negative inference cannot be drawn against the assessee. The Ld. CIT(A) also heavily relied on the report of the investigation wing, he observed that the assessee has made an attempt to avoid payment of tax in the name of tax planningmechanisms, also involved to present convincing picture that assessee is not liable to pay tax on particular transaction. He also made an assumption that the assessee is found to be involved in the organized manipulation, therefore, the Ld. AO has rightly 11

ITA No. 4958/Mum/2025 Sunder Vishan Lakhani made the addition. Though looking to the merits of the case, it can be presumed that the assessee had got the benefit of purchase of sale of shares and has claimed the exemption u/s 10(38) of the Act, however, any addition cannot be made only on the basis of presumption or assumption without having concrete evidence against the assessee to establish that the assessee was involved in such transactions, particularly when the assessee has furnished all the necessary documents to establish genuineness of the transaction. The addition made by the Ld. AO and sustained by Ld. CIT(A) is found to be not in accordance with the mandate of law. Accordingly, we direct to set aside the order of Ld. CIT(A) and to delete the addition made in the present case. 17. In result, the appeal of assessee is allowed, in above terms. Order pronounced in the open court on 29-06-2026.

Sd/- Sd/- (NARENDER KUMAR CHOUDHRY) (ARUN KHODPIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated : 29-06-2026. Ankit K., Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai 12