DCIT, CENTRAL CIRCLE 8(4), MUMBAI, MUMBAI vs. BABULAL BHURMAL JAIN, MUMBAI

Since all the issues involved in these appeals and cross objections are common and identical and belongs to the same assessee, therefore, they have been clubbed, heard together and consolidated order is being passed. Firstly, we shall take ITA No. 1936/Mum/2025, A.Y 2015-16 as lead case and facts narrated therein. The grounds raised by the Revenue are as follows:

On the facts and circumstances of the case and in law, whether the learned Commissioner of Income Tax (Appeals) erred in law and on facts in accepting the assessee's claim that the transactions involving the shares of M/s. Excel Castronics Ltd. are genuine, despite evidence showing that such transactions were part of a colorable arrangement, designed with the sole intent of reducing tax liability through the claim of exempt income.

On the facts and circumstances of the case and in law, whether the Ld. CIT(A) failed to properly evaluate the evidence on record which shows that the trading in the shares of M/s. Excel Castronics Ltd. was manipulated in a synchronized manner and was controlled by operator entities, where shares were offloaded once prices were artificially jacked up. As a result, the assessee's claim of exempt income from the sale of shares cannot be treated as genuine.

On the facts and circumstances of the case and in law, whether the Ld. CIT(A) erred in failing to consider the well-organized nature of the transactions, where the shares were purchased at low prices and later offloaded at artificially high prices, creating a scenario where external investors lost money. This modus operandi suggests that the transactions were carried out as part of a tax avoidance scheme and the Ld. CIT(A) should have rejected the assessee's claim on the basis of such organized manipulation.

On the facts and circumstances of the case and in law, whether the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer, despite the clear evidence of manipulative trading practices and the lack of genuine evidence supporting the assessee's claims regarding the transactions of the shares in question. The A.O. rightly made the addition based on the facts and circumstances of the case, and the CIT(A)'s order deleting the addition was incorrect.

On the facts and circumstances of the case and in law, whether the Ld.CIT Appeal wrongly upheld the claim that the transaction was genuine, leading to the erroneous exclusion of the unexplained cash credit of Rs. 54,79,415/-under section 68 of the Income Tax Act. Furthermore, the commission of Rs. 54,794/-(1% of the transaction value) was also incorrectly excluded from the total income.

The appellant craves leave to add to, alter, amend, modify and/or delete any or all of the above said grounds of appeal, the appellant reserves its right to file further submissions in the appeal.

All the grounds raised by the Revenue are interrelated and interconnected and relates to challenging the order of the Ld. CIT(A) in deleting the additions made by the AO under Section 68 of the Act. Therefore, we have decided to adjudicate these grounds through the present consolidated order. The Ld. DR appearing on behalf of the Revenue, while relying upon the order of the AO, also submitted written submissions. On the other hand, the Ld. AR appearing on behalf of the assessee reiterated the same arguments as were raised by him before the Revenue authorities and also relied upon the order passed by the Ld. CIT(A) with regard to the deletion of the additions on merits under Section 68 of the Act, reserving his right to argue independently on the grounds raised in his cross-objections.

We have heard counsel for both the parties, perused the material placed on record, the judgments cited before us, and also the orders passed by the Revenue authorities. From the records, we noticed that the assessee filed its return for the year under consideration, thereafter the assessment was reopened under Section 147 of the Act on the information received from the DGIT Investigation Wing, wherein it was informed that the assessee is one of the beneficiaries of bogus LTCG from shares of M/s. Excel Castronics Ltd. The said company, according to the Revenue, was a penny stock company and had been manipulated by entry operators to provide accommodation entries to various beneficiaries in the form of fictitious/bogus LTCG from the shares of M/s. Excel Castronics Ltd. Accordingly, the case of the assessee was reopened and, after providing an opportunity of hearing, additions were made, which were ultimately deleted by the Ld. CIT(A).

Before we proceed further, it is necessary to evaluate the order passed by the Ld. CIT(A) while dealing with these grounds raised by the assessee. The operative portion of the order of the Ld. CIT(A) is contained in Paras 18 to 32 and the same is reproduced herein below:

GROUND NO 4 to 13

The assessee made an application to M/s. BCB Brokerage Pvt. Ltd. on 18th September, 2013 for dematerialization of 1,00,000 equity shares of M/s. Excel Castronics Ltd. The acknowledgment of the application for dematerialization to M/s. BCB Brokerage Pvt. Ltd. on 18th September, 2013 is at page 72. The said 1,00,000 equity shares of M/s. Excel Castronics Ltd. were credited to the demat account of the assessee on 25th September, 2013. The demat account statement reflecting the dematerialization of 1,00,000 equity shares of M/s. Excel Castronics Ltd. on 25th September, 2013 is at pages 74 to 77. Therefore, the purchase of 1,00,000 equity shares of M/s. Excel Castronics Ltd. for Rs. 10/- each aggregating to Rs. 10,00,000/-is proved by the assessee.

I have considered the assessment order, submission of the appellant, and facts available on record. In the assessment order, the AO noted that the assessee is an individual and is engaged in share trading (F&O) and investment in shares and securities. He is a partner in various firms, M/s Rainbow Exim Trade LLP, M/s Rainbow Sports Cars LLP, M/s Muscle Car LLP, and M/s Cenzer Reality. The assessee is also a proprietor of M/s Sunrise Investments and M/s Nadol Property.

During the assessment proceedings, the AO issued notice u/s 142(1) and the assessee was asked to show cause why the receipts on account of sale of the alleged scrip of M/s Excel Castronics Ltd should not be treated as unexplained cash credits u/s 68 of the I.T Act. In response to this, the assessee has furnished the documentary evidences regarding purchase and sale of these alleged shares. The assessee has submitted the following documentary evidences: -

After considering the submissions filed by the assesse, the AO held that in the investigation carried out by the Rajkot Investigation Unit, it is already proved that the alleged scrip is manipulated to provide accommodation entries. The detailed analysis of the financials of the alleged company does not support the price rise of the scrip. Therefore, merely filling the details of purchase of shares, details of payments, and details of sales and bank statement does not prove that the transactions are genuine. The transaction is nothing but a colorable device used to claim the exempt income to reduce tax liability. Relying on the decision of Hon'ble Supreme Court in the case of Sumati Dayal vs CIT (214 ITR 801) and decision in the case of CIT vs Durga Prasad More, the AO held the transaction as bogus and accordingly the entire credit of Rs.54,79,415/- shown from sale of the alleged scrip M/s Excel Castronics Ltd is held as unexplained cash credit u/s 68 of the I.T Act. The AO also added the commission income of Rs.54,794/- being 1% commission on the alleged transactions.

In the written submission filed before me, the appellant has submitted the following documentary evidence:

(During During the F.Y 2011-12, the appellant has applied for preferential allotment of 1 lakh equity shares of M/s Excel Castronics Ltd for Rs 10 per share vide letter dated 28.01.2012. For this, the appellant has paid Rs.10 lakhs by cheque, and the payment is also reflected in the statement of bank account. Thereafter, 1 lakh preferential shares were allotted to the appellant. The shares were subsequently dematerialized. During the A.Y 2014-15 the appellant has sold 78,561 shares for Rs.1,90,87,536/-. The remaining 21,439 shares have been sold in the A.Y under consideration. These shares were sold online through the broker M/s BCB Brokerage Pvt Ltd. It is seen from these details that the shares were purchased offline through preferential allotment for which payment of Rs. 10 lakhs was made through the banking channel. Thereafter, these shares were sold on the stock exchange through the broker, and the transactions are supported by the broker's note All the transactions are carried out through the banking channels and supported by the brokers notes.

The facts in the appellant's case are summarized as under-

Vide an application dated 28.01.2012, the appellant requested for preferential allotment of 1 lakh equity shares of M/s Excel Castronics Ltd @ Rs 10 per share.

For this, the appellant issued a cheque bearing no. 668480 of Rs 10 lakhs.

M/s Excel Castronics Ltd vide letter dated 31.01.2012 acknowledged the receipt of the cheque.

M/s Excel Castronics Ltd has allotted 1 lakh preferential shares to the appellant on 28.03.2013.

The appellant received share certificate no. 7760 having distinctive numbers from 3867207 to 3967200.

The 1 lakh equity shares were credited to the demat account of the appellant on 25.09.2013 by the broker M/s BCB Brokerage Pvt Ltd.

In the FY 2013-14, the appellant has sold 78,561 shares of M/s Excel Castronics Ltd.

The remaining 21,439 equity shares were sold in FY 2014-15.

These shares were sold on the stock exchange through the broker M/s BCB Brokerage Pvt Ltd.

On perusal of the Income tax return for A.Y 2015-16, it is seen that the appellant has shown a net loss of Rs.18,32,466/- from Sunrise Investments. The appellant has also shown STCG of Rs.40,32,655. From the statement of capital gains, it is observed that during the year under consideration, the appellant has purchased and sold around 54 scrips showing net STCG of Rs.40,32,655 and net LTCG of Rs.50,45,560. From this, it is apparent that the appellant is a regular investor and trader in the share market. The main source of income of the appellant is from share trading and investment. It is not a case that the appellant is a naïve investor in the share market and has only purchased and sold the alleged scrip of M/s Excel Castronics Ltd. The facts indicate that the alleged capitai gains are on account of regular trading/investment activity carried out by the appellant.

The appellant is engaged in share trading (F&O) and investment and trading in shares. The details of the same is as under-

The AO has relied only on the investigation report of Rajkot Investigation Unit and has not brought any material which indicated that the appellant has carried out bogus transactions in connivance with the aileged operators of the scrip. Particularly in the facts that the appellant is a regular investor in the share market and there are no adverse findings in case of appellant in any inquiry report, in my humble opinion, reliance on the probability angle is not correct in the facts of the case.

The Hon'ble ITAT Mumbai on identical facts while deciding the issue of capital gains in case of Ms. Nidhi Manan Shah v ITO (ITA Nos. 3255 & 3256 & 3257/Mum/2023) vide order dated 06.11.2024 has held that the sale of shares of M/s. Excel Castronics Ltd. cannot be held to be a penny stock and therefore, the capital gains are rightly claimed as exempt u/s.10(38) of the Act. The Hon'ble Tribunal has held as under-

With regard to the genuineness of capital gains declared by the asssssee, we notice that the AO has not conducted any independent enquiry to show that the trading transactions conducted by the assessee were not genuine. Further, the AO has not shown that the assessee was part of the group which was indulging in manipulation of prices of the shares of above said company. Further, it is not shown that the transactions entered by the assessee were found to be bogus by SEBI. On the contrary, the contention of the assessee is that she was not subjected to any enquiry by SEBI. Barring the failure of the assessee to prove actual date of purchase of shares, the assessee has furnished the details of demat account and details of sale of shares and those documents were not found to be not correct. Under these set of facts, we are of the view that the claim of purchase and sale of shares cannot be doubted with, in the ITA Nos. 3255, 3256 & 3257/Mum/2023 facts and circumstances of the case. Depending upon the actual date of allotment/purchase of shares, the capital gains earned by the assessee are required to be categorized into Short term or Long term.

Thus, for determining the question whether the assessee has earned long term capital gains or short term capital gains, It is necessary to ascertain the holding period of shares, le.. time period commencing from the date of allotment of shares and ending with the date of sale of shares needs to be found out. We noticed that the assessee has failed to prove the date of allotment/purchase. Accordingly, in the interest of natural justice, we are of the view that the assessee may be provided with one more opportunity to prove the date of allotment/purchase of shares. Accordingly, the orders passed by the Ld.CIT(A) in all these years are set aside and all the matters are restored to the file of the AO. The assessee is directed to furnish details regarding date of allotment/purchase of shares and on that basis, the AO may compute the capital gains either short term or long term in accordance with law. The assessee shall be provided adequate opportunity of being heard. We also direct the assessee to fully co-operate with the AO for expeditious completion of the assessment."

The appellant has furnished a comparative chart analyzing the facts involved in the appellant's case and in case of Ms. Nidhi Manan Shah. It is observed that in case of Ms Nidhi Shaha also the shares of M/s. Excel Castronics Ltd. were purchased offline through preferential allotments. Most the facts are identical in both the cases. Therefore, the decision of Hon'ble ITAT in case of Ms. Nidhi Shaha is applicable in the appellant's case.

In view of the fact that the appellant is a regular investor and tracer in the share market, I hold that the alleged shares have been purchased and sold in the regular business/investment activity of the appellant. Further, there is no finding that the purchase of the shares has been carried out through cash or any cash has been exchanged in lieu of sale consideration. There is no finding which indicates the connection or involvement of appellant with the persons indulged in providing accommodation entry. Therefore, considering the facts of the case and the decision of Hon'ble ITAT in case of Ms. Nidhi Manan Shah as discussed above, the addition made by the A.O is deleted. Thus appeal on these grounds is ALLOWED.

GROUND NO 14 and 15

In the result appeal is PARTLY ALLOWED.

After having heard the counsels of both the parties at length and perused the materials placed on record, we found that during the course of assessment proceedings, in order to verify the genuineness of the long-term capital gain earned by the assessee, the AO made verification and sought a reply from the assessee. Thus in order to substantiate that the transaction of sale of shares of M/s. Excel Castronics Ltd. was genuine, the assessee submitted following documents:

The assessee also submitted that he has investment experience in shares of more than 30 years and, to support his contention, had submitted details of Futures and Options transactions carried out by him from AY 2008-09 to AY 2020-21.

However, we noticed that in order to counter the documents placed on record, the AO had not brought anything on record to show that the assessee was either connected with or involved in manipulation of shares of M/s. Excel Castronics Ltd. There is no evidence of exchange of any cash for the alleged transaction.

After appreciating the documents placed on record, we also found that there is no adverse finding of the market regulator SEBI in the case of the assessee. The AO had not carried out any independent inquiry and merely relied on the report of the Investigation Wing. We further notice that during FY 2011-12, the assessee applied for preferential allotment of 1 lakh equity shares of M/s. Excel Castronics Ltd. for Rs. 10 per share vide letter dated 28.01.2012. For this, the assessee paid Rs. 10 lakhs by cheque, and the payment is also reflected in the bank statement. Thereafter, 1 lakh preferential shares were allotted to the assessee. The shares were subsequently dematerialized. During AY 2014-15, the assessee sold 78,561 shares for Rs. 1,90,87,536/-. The remaining 21,439 shares were sold in the AY under consideration. These shares were sold online through the broker M/s. BCB Brokerage Pvt. Ltd. It is seen from these details that the shares were purchased offline through preferential allotment for which payment of Rs. 10 lakhs was made through banking channels. Thereafter, these shares were sold on the stock exchange through the broker, and the transactions are supported by the broker’s notes. Since in the present case the LTCG earned by the assessee was denied by the AO relying upon the Investigation Report of the Rajkot Investigation Unit, and no material was brought on record indicating that the assessee had carried out bogus transactions in connivance with the alleged operators, particularly considering the fact that the assessee is a regular investor in the share market, the claim of the assessee cannot be doubted.

Even the Coordinate Bench of the ITAT, on identical facts while deciding the issue of capital gains in the case of Ms. Nidhi Manan Shah v. ITO (ITA Nos. 3255, 3256 & 3257/Mum/2023) vide order dated 06.11.2024, has held that the sale of shares of M/s. Excel Castronics Ltd. cannot be held to be a penny stock and therefore the capital gains are rightly claimed as exempt under Section 10(38) of the Act. The Tribunal held as under:

With regard to the genuineness of capital gains declared by the assessee, we notice that the AO has not conducted any independent enquiry to show that the trading transactions conducted by the assessee were not genuine. Further, the AO has not shown that the assessee was part of the group indulging in manipulation of prices of the shares of the above said company. Further, it is not shown that the transactions entered into by the assessee were found to be bogus by SEBI. On the contrary, the contention of the assessee is that she was not subjected to any enquiry by SEBI. Barring the failure of the assessee to prove the actual date of purchase of shares, the assessee has furnished the details of the demat account and details of sale of shares and those documents were not found to be incorrect. Under these set of facts, we are of the view that the claim of purchase and sale of shares cannot be doubted in the facts and circumstances of the case. Depending upon the actual date of allotment/purchase of shares, the capital gains earned by the assessee are required to be categorized into short- term or long-term capital gains.

Thus, for determining the question whether the assessee has earned long-term capital gains or short-term capital gains, it is necessary to ascertain the holding period of shares, i.e., the time period commencing from the date of allotment of shares and ending with the date of sale of shares. We noticed that the assessee failed to prove the date of allotment/purchase. Accordingly, in the interest of natural justice, we are of the view that the assessee may be provided one more opportunity to prove the date of allotment/purchase of shares. Accordingly, the orders passed by the Ld. CIT(A) in all these years are set aside and all the matters are restored to the file of the AO. The assessee is directed to furnish details regarding the date of allotment/purchase of shares and on that basis, the AO may compute the capital gains either as short-term or long-term in accordance with law. The assessee shall be provided adequate opportunity of being heard. We also direct the assessee to fully cooperate with the AO for expeditious completion of the assessment.”

After further appreciating the facts, we notice that the Ld. CIT(A), while allowing the appeal of the assessee and deleting the disallowance made by the AO, also relied upon the decision of the Coordinate Bench of the ITAT in the case of Ms. Nidhi Manan Shah v. ITO (supra). On the contrary, although the Ld. DR had contested the order passed by the Ld. CIT(A) and had relied upon a number of judgments mentioned in his written submissions, he could not controvert the findings of the Coordinate Bench of the ITAT in the case of Ms. Nidhi Manan Shah v. ITO (supra), wherein the same scrip, i.e., M/s. Excel Castronics Ltd., was scrutinized and held not to be a penny stock company. The facts contained in the decisions relied upon by the Ld. DR are different from the facts of the present case, whereas, on the contrary, the Coordinate Bench of the ITAT has dealt with the same scrip, i.e., M/s. Excel Castronics Ltd. Thus, the Ld. CIT(A) was right in relying upon the decision of the Coordinate Bench of the ITAT in the case of Ms. Nidhi Manan Shah v. ITO (supra).

No new facts, circumstances, or documents have been placed on record by the Ld. DR in order to controvert or rebut the lawful findings so recorded by the Ld. CIT(A). Therefore, we see no reason to interfere with or deviate from the findings so recorded by the Ld. CIT(A). Hence, we dismiss the grounds raised by the Revenue and uphold the order of the Ld. CIT(A) deleting the additions.

In the result, the appeal filed by the Revenue is dismissed.

As the facts and circumstances in these appeals are identical to that of ITA No. 1936/Mum/2025 and CO 99/MUM/2025 (Arising out of ITA No. 1936/Mum/2025, A.Y 2015-16) therefore, the decision rendered in above paragraphs would apply mutatis mutandis for these appeals also.