HEMANT DEVJI THAKKAR HUF,MUMBAI vs. ASSESSING OFFICER, MUMBAI

The assessee has raised the following grounds of appeal:

Facts of the case are such that the assessee is a Hindu undivided family. It filed its original return on 30.07.2012 declaring total income of Rs. 1,82,391/-. According to the assessment order, the return disclosed income from house property, short term capital gains and other sources, and claimed deductions under Chapter VI- A.

The Assessing Officer received information from the office of the DDIT (Investigation), Unit-8(2), Mumbai, by letter dated 22.10.2018 concerning transactions in shares of Aarya Global Shares and Securities Ltd., scrip code 531731. The information described the company as a penny stock allegedly used to provide accommodation entries in the form of capital gains or losses. The assessment order records the Assessing Officer’s view that the assessee had traded in that scrip during financial year 2011-12. In narrating the information leading to reopening, it refers to a sale value of Rs. 2,23,454/-.

After obtaining approval under section 151(1), the Assessing Officer issued notice under section 148 dated 29.03.2019. The assessee filed a return in response on 24.04.2019 declaring the same total income of Rs. 1,82,391/-.

In the assessment order, the Assessing Officer discussed the company’s history, financial results, share price movement, trading volume, certain observations attributed to SEBI, and the general manner in which accommodation entries may be arranged through penny stocks. The show cause notice proposed to treat the assessee’s transaction as a bogus capital gains transaction and to add Rs. 2,23,454/- under section 68. 7. The Assessing Officer recorded that, on the basis of the assessee’s submission and information gathered from third parties, the assessee had purchased 17,548 shares for Rs. 4,07,900/- during financial year 2011-12 and sold 9,048 shares for Rs. 2,23,345/- during that year. He rejected the assessee’s explanation on the ground that it had transacted in the identified scrip. The entire stated sale proceeds of Rs. 2,23,345/- were added under section 68, without a separate determination of the result of the individual transactions. Total income was assessed at Rs. 4,05,740/- after rounding.

The assessee challenged the addition before the learned CIT(A). Its explanation was that the figure adopted by the Assessing Officer comprised different transactions: shares bought and sold on the same day, which were stated to have yielded speculative profit, and a delivery based sale resulting in a short term capital loss. The assessee contended that the same day trades were settled by payment of the difference, that their gross sale values were not received as such, and that the relevant profit and loss had been disclosed. It also referred to broker statements and other transaction records.

The learned CIT(A) dismissed the appeal. He relied upon the investigation information, the financial and price analysis of the company, and the general description of the alleged accommodation entry arrangement in the assessment order. He held that the assessee’s explanation about speculative settlement and receipt of only the net difference was unacceptable in light of the surrounding circumstances and human probabilities. He further held that contract notes, demat statements and bank entries did not establish genuineness when the transaction chain was found to be manipulated. Accordingly, he confirmed the addition of Rs. 2,23,345/- and dismissed the appeal.

Before us the learned Authorised Representative (AR) submitted that the lower authorities had treated the aggregate sale value as unexplained income without determining what the assessee had actually received or earned. Referring to the transaction summary, he submitted that shares purchased and sold on the same day had an aggregate purchase value of Rs. 2,03,119/- and sale value of Rs. 2,14,862/-, giving speculative profit of Rs. 11,743/-. He further submitted that 500 shares acquired for Rs. 12,174/- were sold for Rs. 8,483/-, giving a short term capital loss of Rs. 3,691/-. According to him, the speculative profit and the loss were reflected in the returns, including the return filed in response to notice under section 148. 11. The learned AR explained that the speculative transactions were settled by the broker on a net basis. He referred to the broker’s transaction documents at paper book pages 103 to 114, the bank

The learned AR further submitted that the Assessing Officer’s discussion of the scrip’s later price movement and the general modus operandi did not establish the assessee’s participation in price manipulation. He pointed out that the assessee’s stated transactions occurred between June and July 2011, whereas part of the Assessing Officer’s price analysis expressly referred to a period commencing on 17.08.2011. He relied upon the decisions cited in his written submission, particularly those concerning transactions in the same scrip. He also cited the decision of Hon’ble High Court of Bombay in case of Principal Commissioner of Income Tax v. Shodiman Investments (P.) Ltd. (ITA No.1297 of 2015) in support of his submission concerning reliance on investigation information. The learned AR also relied on the decision of Co-ordinate Bench in ITO v. Champalal Gopiram Agarwal, ITA No. 592/Ahd/2020, order dated 23.12.2022, where the Bench considered dealings in Aarya Global Shares and Securities Ltd. and gave relief to the assessee.

The learned Departmental Representative relied upon the assessment order and the order of the learned CIT(A). He supported the addition of Rs. 2,23,345/- under section 68. 14. We have considered the rival submissions and the material placed before us. The question is whether the Assessing Officer was justified in treating the entire stated sale value of Rs. 2,23,345/- as unexplained income under section 68. The answer requires examination of the assessee’s transactions and the explanation of the nature and source of the amount sought to be added. The identification of a scrip in an investigation report is relevant information, but it does not, by itself, determine the character of every transaction entered into by every person who traded in that scrip.

Section 68, as applicable to the year under consideration, concerns a sum found credited in the assessee’s books for which no satisfactory explanation of its nature and source is offered. It follows that the credit sought to be taxed and the explanation concerning it must be examined. The subsequent amendments concerning specified classes of credits do not determine this appeal concerning assessment year 2012-13. 16. In the present case, the Assessing Officer himself recorded purchases of shares for Rs. 4,07,900/- and sales of 9,048 shares for Rs. 2,23,345/-. He did not reject a specified purchase as fictitious, identify an unexplained credit corresponding to each disputed trade, or find that an identified person returned the assessee’s cash through the broker. His stated reason for rejecting the reply was that the assessee had transacted in the scrip under investigation. The order does not reconcile that conclusion with the assessee’s explanation that a substantial part of the gross sale figure related to same day trades settled by net differences.

The distinction is material. The assessee’s transaction summary describes same day purchases of Rs. 2,03,119/- and sales of Rs. 2,14,862/-, resulting in a difference of Rs. 11,743/-. It describes a separate delivery based sale of Rs. 8,483/- against cost of Rs. 12,174/-. We do not treat a transaction as genuine merely because a broker statement, demat statement or bank entry is produced. Equally, the gross value of a contract cannot be treated as an unexplained receipt without addressing a specific explanation that the contract was settled by payment of its difference. The Assessing Officer did not make that enquiry in his concluding findings.

The Assessing Officer’s analysis of the company’s financial position, trading volume and reported price movement may warrant scrutiny of an assessee’s claim. In this assessment, however, the discussion of the price movement over the period 17.08.2011 to 09.03.2015 has not been related to the assessee’s identified trades in June and July 2011. Nor does the assessment order record a finding that the assessee, its broker or an identified counterparty participated in the alleged arrangement. The learned CIT(A) adopted the general investigation findings without resolving the assessee’s distinct explanation concerning same day settlement and the separate delivery-based transaction.

In ITO v. Champalal Gopiram Agarwal, ITA No. 592/Ahd/2020, the Co-ordinate Bench considered dealings in Aarya Global Shares and Securities Ltd. It observed in paragraph 9.2: “In our view, the income generated by the assessee cannot be held bogus only on the basis of the modus operandi, generalisation, and assumptions of certain facts. In order to hold income earned or loss incurred by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stock brokers for such an arrangements. In absence of such finding, no adverse inference can be drawn against the assessee.”

The bench held that a general account of a modus operandi could not, without an assessee-specific finding, establish the alleged collusion in the transactions before it. The Gujarat High Court, in PCIT v. Champalal Gopiram Agarwal, R/Tax Appeal No. 366 of 2023, order dated 25.07.2023, declined to interfere with that fact-based conclusion. Its order records:

The learned tribunal has also observed that the respondent had successfully discharged the initial burden cast upon it under the provisions of section 68 of the Act. It is not in dispute that the shares of the aforesaid two companies were purchased online and the payments were made through banking channel and the shares were dematerialized and the shares have been routed from demat account and the consideration was also received through bank channels. The AO does not have any independent source or evidence to show that there was an agreement between the assessee and any other party. The learned tribunal has also observed that in absence of any specific finding against the assessee, the assessee cannot be held to be linked to the wrong acts merely on the basis of surmises and assumptions.

The High Court’s decision affirms the Tribunal’s conclusion on the evidence in that case. We apply its reasoning to the particular findings, and absence of findings, in the present assessment.

We accordingly find that the Assessing Officer’s conclusion does not establish why Rs. 2,23,345/- in its entirety was chargeable under section 68. The learned CIT(A) did not cure that deficiency by addressing the composition of the amount or the asserted net settlement. The addition rests on the characterisation of the scrip and a general account of accommodation entries, without a finding connecting the assessee’s particular trades to such an arrangement or demonstrating that the stated gross sale value represented an unexplained sum credited to it. On the facts and findings recorded in the orders under appeal, the addition cannot be sustained.

We, therefore, set aside the order of the learned CIT(A) on this issue and direct the Assessing Officer to delete the addition of Rs. 2,23,345/- made under section 68. Grounds 1 to 10 are allowed to that extent. Ground 11 is general and requires no separate adjudication.

In the result, the appeal of the assessee is allowed.

Mumbai 6. गाड" फाईल / Guard file.