KANTABEN BHOGILAL KUBADIA,DADAR WEST vs. INCOME TAX OFFICER WARD 22(2)(1), MUMBAI, PIRAMAL CHAMBER LALBAUG

The order dated 28/05/2025 bearing No. ITBA/NFAC/S/250/2025-26/1076512058(1) by the CIT[A], National Faceless Appeal Centre, Delhi is arbitrary, against natural justice, unlawful, against the provisions of Income Tax Act, 1961 and therefore liable to be quashed.

On facts and in the circumstances of the case and in law the C.I.T.(Appeals) has erred in confirming the addition made u/s.68 of the Income Tax Act, 1961 amounting to Rs.80,35,770/- on account of Long Term Capital Gain claimed as exempt under section 10[38] of the Income Tax Act, 1961 by the appellant.

On facts and in the circumstances of the case and in law the C.I.T(Appeals) has erred in confirming addition made u/s. 68 of the Income Tax Act, 1961 amounting to Rs.6,42,862/- being commission paid @ 8% of the Long-Term Capital Gain

The appellant craves to alter, add, delete, substitute, or modify and other grounds of appeal.

Ground Nos. 1 and 2 raised by the assessee are interrelated and interconnected and relate to challenging the order of the Ld. CIT(A) in confirming the addition made by the AO under Section 68 of the Act. Therefore, we have decided to adjudicate these grounds through the present consolidated order.

From the record, we noticed that the assessee, being an individual, filed her return of income.

Subsequently, the assessment was reopened on the basis of information that the LTCG claimed by the assessee as exempt under Section 10(38) on long-term capital gains arising from the sale of shares of NCL Research and Financial Services Ltd. was treated as unexplained cash credit, and accordingly, additions were made under Section 68 of the Act.

We have heard the counsels for both parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we noticed that during the course of the assessment proceedings, the AO observed that the assessee had shown the purchase of 20,000 preferential shares of NCL Research and Financial Services Ltd., which were allotted for Rs. 35 lakhs.

It was observed that the Director of Investigation had carried out a countrywide investigation in order to unearth the organized racket generating LTCG which is exempt from Income Tax. A detailed investigation was conducted, and the investigation report was sent to all the AOs who were assessing such cases. Therefore, on the basis of the said investigation carried out by the Investigation Wing, Kolkata, the case of the assessee was reopened. During the course of the assessment proceedings, the AO concluded that the LTCG claimed by the assessee was pre-arranged and bogus and, therefore, rejected the entire capital gain received on the sale of shares and added the same as taxable income under Section 68 of the Act without allowing the exemption under Section 10(38) of the Act.

On the contrary, it was submitted that the assessee had purchased 20,000 preferential shares and, in this regard, had relied upon the following documents:

The assessee sold 6,200 shares of M/s. NCL Research & Financial Services Ltd. during the year under consideration on the Bombay Stock Exchange through the broker M/s. MNS Securities Ltd. In support of the sale, the assessee furnished the following details before the Assessing Officer during the course of the assessment proceedings:

However, the claim of the assessee was rejected on the basis of the investigation conducted by the Investigation Wing, Kolkata, after recording the statements of various operators and brokers and noticing an unusual trend in the market price of the shares. Accordingly, M/s. NCL Research & Financial Services Ltd. was held to be a penny stock. Whereas, it was submitted that there was neither any circumstantial nor any direct evidence against the assessee to prove that the LTCG shown by the assessee was not genuine but was an arranged transaction.

In this regard, the ld. AR invited our attention to the statement on oath of Gautam Bose recorded on 27/05/2015, which is partly reproduced in the Assessment Order. Question No. 13 reads as under:

After having considered the above details, we find that the name of the assessee does not appear in the above list. Thus, the said statement cannot be used as evidence against the appellant. Hence, the addition made by the Assessing Officer is arbitrary and unjustified.

The fact that these shares have appreciated in value to a great extent does not mean that the capital gain earned is bogus. We find that the purchase transactions have taken place through banking channels, the shares are held in dematerialized form, and the sale transactions have taken place on a recognized stock exchange and have been subjected to Securities Transaction Tax (STT). Thus, considering the totality of the facts, the market price of an equity share on the stock exchange cannot be controlled by an individual, and market prices keep fluctuating depending upon various factors. Therefore, there is no question of the capital gain being bogus.

Although the AO, while rejecting the claim of the assessee, relied upon the following decisions:

After going through the decisions relied upon by the Revenue Authorities, we find that the facts involved therein are clearly distinguishable from the facts of the present case. In all the above cases, the source of purchase or the genuineness of the purchase transactions was not proved, and hence the capital gain so earned was treated as bogus. However, in the present case, the source of purchase and the genuineness of the transactions stand duly proved, and the same has not been controverted by the AO.

We further noticed that, despite a specific request, an opportunity to cross-examine the deponent was not afforded to the assessee, in violation of the principle laid down by the Hon'ble Supreme Court in Andaman Timber Industries [62 taxmann.com 3 (SC)].

We also noticed that, in order to prove the genuineness of the transactions, the assessee has placed the following documents on record:

Reliance in this regard is being placed upon the following decisions:

From the documents produced before us, which were also in the possession of the Assessing Officer, it is seen that the shares in question were in fact purchased by the assessees on the respective dates and the company has confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares to the respective buyers is also established by producing documentary evidence. It is true that some of the transactions were off-market transactions However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates as is seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions cannot be a ground to treat the transactions as trade transactions as a sham transaction.

High Court of Gujarat in case of Commissioner of Income-tax-1 Vs. Himani M Vakil [2013]10 taxmann.com 326 (Gujarat) held that where assessee duly proved genuineness of share transactions by bringing on record contract notes for sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, Assessing Officer was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit.

We noticed that the assessee placed on record all the necessary documents in order to prove the identity, creditworthiness, and genuineness of the share transactions. However, the AO could not point out any defect in the documentary evidence placed on record and relied upon by the assessee.

Moreover, the Coordinate Bench of the ITAT, in the case of Minu Gupta in ITA No. 731/Kol/2018, has dealt with the said scrip and deleted the addition based on the same scrip and the operative portion of the same is reproduced herein below:

We note that the coordinate bench of this Tribunal in the case of Prakash Chand Bhutoria ITA No. 2394/Kol/2017 dated 27.06.2018 upheld the assessee's claim of LTCG on sale of shares of M/s. Unno Industries Ltd. for AY 2014-15, as in the instant case before us so respectfully following the decision and also taking note of the documents filed before us (paper book page 19 to 31) from which we note that assessee has discharged its onus to prove the genuineness of the transaction of the purchase of shares by filing the share certificate along with share transfer advice of Pinnacle Vintrade Ltd (pages 19 to 21PB) and the purchases having taken place through bank transaction (page 23 PB) and later bonus share allotment letter (page 25PB) and bonus share certificate (page 24 PB) and thereafter by virtue of Amalgamation scheme allotment letter of M/s Unno Industries Ltd (page 26 PB) which were sold through registered broker of Bombay Stock Exchange (M/s. Anand Rathi Securities Ltd). and sale of scrips is evidence by contract note of sale (page 27 PB) and transaction happened through banking transaction (page 28 of paper book). Since AO/Ld. CIT(A) could not find any fault or specific adverse materials against the assessee/broker/ or scrips of M/s. NCL, the addition u/s. 68 cannot be sustained. The addition based on a common/general report of DIT (Inv.) and there is nothing in the report specifically against the assessee, cannot be the basis for making the addition or draw adverse inference against the assessee. So the action of AO/Ld. CIT(A) cannot be sustained and therefore, the claim of exempt income on LTCG on sale of scrips of M/s. NCL has to be allowed and, therefore, the addition on this issue is directed to be deleted.

Thus, considering the totality of the facts and circumstances, and also keeping in view the doctrine of binding precedents and maintaining judicial consistency, we set aside the order passed by the ld. CIT(A) and direct the AO to delete the impugned additions.

Since we have already deleted the additions while adjudicating Ground Nos. 1 and 2, Ground No. 3 raised by the assessee becomes consequential in nature and, therefore, does not require separate adjudication.

In the result, the appeal filed by the assessee stands partly allowed.