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Facts
The assessee purchased shares of a penny stock company in 2007 and sold them in 2010-2011 for a substantial profit. The Assessing Officer (AO) and CIT(A) treated the sale proceeds as unexplained cash credit and commission, respectively, alleging the transactions were part of a scheme to introduce unaccounted income.
Held
The Tribunal held that the AO and CIT(A) failed to establish a direct nexus between the assessee and any alleged price rigging or accommodation entry operators. Suspicion, however strong, cannot substitute legal proof, and the additions were based on general modus operandi without specific evidence linking the assessee.
Key Issues
Whether additions under Section 68 and 69C are justified based on alleged penny stock manipulation and generic modus operandi without specific evidence against the assessee; and whether the burden of proof was incorrectly placed on the assessee.
Sections Cited
68, 69C, 10(38), 45, 263, 148
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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC” MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI OM PRAKASH KANT
ORDER PER OM PRAKASH KANT, AM
This appeal by the assessee is directed against order dated 26.03.2025 passed by the Ld. Additional/Joint Commissioner of Income-tax (Appeals) – 2, Gurugram [hereinafter shall be referred as ‘Ld. CIT(A)’] for assessment year 2011-12, raising following grounds:
GROUND I A. On the facts and circumstances of the case, the CIT(A) erred adding sale proceeds on sale of alleged penny stock of Rs. 14,77,822/- u/s 68 of the Act as Cash Credit.
B. On the facts and circumstances of the case and in law the AO B. On the facts and circumstances of the case and in law the AO B. On the facts and circumstances of the case and in law the AO and CITA failed to appreciate that: and CITA failed to appreciate that: i. The AO made the addition without providing any tangible i. The AO made the addition without providing any tangible i. The AO made the addition without providing any tangible material or evidencing the alleged involvement of the assessee in material or evidencing the alleged involvement of the assessee in material or evidencing the alleged involvement of the assessee in the scheme of things and did not provide opportunity for cross scheme of things and did not provide opportunity for cross scheme of things and did not provide opportunity for cross examination. ii. The assessee has made purchases and sold the shares via ii. The assessee has made purchases and sold the shares via ii. The assessee has made purchases and sold the shares via registered stock broker on a registered stock exchange by paying registered stock broker on a registered stock exchange by paying registered stock broker on a registered stock exchange by paying the STT, duly reflected in the Dmat stataments, and has mad the STT, duly reflected in the Dmat stataments, and has mad the STT, duly reflected in the Dmat stataments, and has made all payments for purchases via proper banking channel. payments for purchases via proper banking channel. iii. The Assessee is a genuine investor who held the shares for iii. The Assessee is a genuine investor who held the shares for iii. The Assessee is a genuine investor who held the shares for almost 4 years, and made meagre profit of Rs.301078/ on almost 4 years, and made meagre profit of Rs.301078/ on almost 4 years, and made meagre profit of Rs.301078/ on purchases of Rs.11,76,745/ purchases of Rs.11,76,745/- working out to 25.58%. iv. The assessee has dischar iv. The assessee has discharged his onus by submitting all the ged his onus by submitting all the relevant documents such as contract notes, demat statement, relevant documents such as contract notes, demat statement, relevant documents such as contract notes, demat statement, broker ledger and bank statement, thus addition u/s 68 is bad at broker ledger and bank statement, thus addition u/s 68 is bad at broker ledger and bank statement, thus addition u/s 68 is bad at law. V. The AO has added whole of sales proceeds U/s68 ignoring the V. The AO has added whole of sales proceeds U/s68 ignoring the V. The AO has added whole of sales proceeds U/s68 ignoring the capital gain of Rs.3,01,078/ capital gain of Rs.3,01,078/- already offered to tax, thus taxing already offered to tax, thus taxing the gain twice. the gain twice. C. The appellant, therefore, prays that the addition made of Rs C. The appellant, therefore, prays that the addition made of Rs C. The appellant, therefore, prays that the addition made of Rs 14,77,822/- may please be deleted. may please be deleted. GROUND II A. On the facts and circumstances of the case, the CIT(A) erred in A. On the facts and circumstances of the case, the CIT(A) erred in A. On the facts and circumstances of the case, the CIT(A) erred in adding Rs. 29,556/ u/s 69C adding Rs. 29,556/ u/s 69C of the Act towards commission on of the Act towards commission on alleged bogus Long term capital gains. alleged bogus Long term capital gains. B. On the facts and circumstances of the case and in law the AO B. On the facts and circumstances of the case and in law the AO B. On the facts and circumstances of the case and in law the AO and CITA failed to appreciate that: and CITA failed to appreciate that: i) The addition is made by the AO based on surmises and i) The addition is made by the AO based on surmises and i) The addition is made by the AO based on surmises and conjecture without any evid conjecture without any evidence. ii) The assessee has neither paid nor received any commission ii) The assessee has neither paid nor received any commission ii) The assessee has neither paid nor received any commission towards the purchase of shares. towards the purchase of shares. iii) The assessee did not claim any expenses to be covered U/s iii) The assessee did not claim any expenses to be covered U/s iii) The assessee did not claim any expenses to be covered U/s 69C. In the absence of any claim addition U/s 69C is bad at law. 69C. In the absence of any claim addition U/s 69C is bad at law. 69C. In the absence of any claim addition U/s 69C is bad at law.
C. The appellant, therefore, C. The appellant, therefore, prays that addition of Rs. 29,556/ prays that addition of Rs. 29,556/- as unexplained expenditure must please unexplained expenditure must please be deleted.
The appeal challenges additions made in reassessment under Sections 68 and 69C of the appeal challenges additions made in reassessment under Sections 68 and 69C of the appeal challenges additions made in reassessment under Sections 68 and 69C of the Income-tax Act, 1961 (“the Act”) on the allegation that the assessee routed unaccounted income tax Act, 1961 (“the Act”) on the allegation that the assessee routed unaccounted income tax Act, 1961 (“the Act”) on the allegation that the assessee routed unaccounted income through Long-Term Capital Gain (LTCG) in the scrip of Term Capital Gain (LTCG) in the scrip of M/s Action Financial Ser M/s Action Financial Services (India) Ltd. (“AFSIL”), treated by the Revenue as a “penny stock”. (“AFSIL”), treated by the Revenue as a “penny stock”. 2.1 Briefly stated, facts of the case are that the assessee filed its Briefly stated, facts of the case are that the assessee filed its Briefly stated, facts of the case are that the assessee filed its return of income for the year under consideration on 26.09.2011 return of income for the year under consideration on 26.09.2011 return of income for the year under consideration on 26.09.2011 declaring declaring total total income income at at Rs.16,81,040/ Rs.16,81,040/-. . Subsequently, Subsequ information was received from the Investigation Wing of the Income- information was received from the Investigation Wing of the Income information was received from the Investigation Wing of the Income taken benefit of the tax Department, Mumbai tax Department, Mumbai that assessee had taken benefit of t abnormal rise in share price abnormal rise in share prices of a ‘penny’ stock company stock company namely The Assessing Officer “M/s Action Financial Services India Ltd. Action Financial Services India Ltd.” The Assessing recorded reasons to believe that income escaped assessment and recorded reasons to believe that income escaped assessment and recorded reasons to believe that income escaped assessment and issued notice u/s 148 of the Act. In response, the assessee filed issued notice u/s 148 of the Act. In response, the assesse issued notice u/s 148 of the Act. In response, the assesse return of income declaring return of income declaring original income.
2.2 During the course of the reassessment proceedings, the During the course of the reassessment proceedings, the During the course of the reassessment proceedings, the assessee stated that shares of M/s Action Financial Services India d that shares of M/s Action Financial Services India d that shares of M/s Action Financial Services India Ltd. were purchased in regular course through a broker along with purchased in regular course through a broker along with purchased in regular course through a broker along with other shares for a sum of Rs.11,76,745/ sum of Rs.11,76,745/- in the year 2007 in the year 2007 and sold in the year 2011 for in the year 2011 for a sum of Rs.14,77,822/-. The assessee stated . The assessee stated that shares were not purchased through any preferential allotment shares were not purchased through any preferential allotment shares were not purchased through any preferential allotment or amalgamation route. or amalgamation route.
2.3 The Assessing Officer, however, referred to the general modus The Assessing Officer, however, referred to the general modus The Assessing Officer, however, referred to the general modus operandi adopted in cases of money laundering through so-called operandi adopted in cases of money laundering through so operandi adopted in cases of money laundering through so "penny stock" companies. It was observed that the usual practice "penny stock" companies. It was observed that the usual practice "penny stock" companies. It was observed that the usual practice involves transfer of shares of such companies to the intended involves transfer of shares of such companies to the intended involves transfer of shares of such companies to the intended beneficiaries at a nominal price, either through preferential eficiaries at a nominal price, either through preferential eficiaries at a nominal price, either through preferential allotments or off-market transactions. Thereafter, the prices of such market transactions. Thereafter, the prices of such market transactions. Thereafter, the prices of such shares are artificially rigged and inflated manifold, often ranging shares are artificially rigged and inflated manifold, often ranging shares are artificially rigged and inflated manifold, often ranging from 500 to 1000 times the acquisition price. Once the price from 500 to 1000 times the acquisition price. Once the pric from 500 to 1000 times the acquisition price. Once the pric reaches the targeted level, the beneficiaries offload the shares, reaches the targeted level, the beneficiaries offload the shares, reaches the targeted level, the beneficiaries offload the shares, which are purchased by a group of which are purchased by a group of persons, referred to as "exit referred to as "exit providers," who deliberately incur losses. Eventually, the prices of providers," who deliberately incur losses. Eventually, the prices of providers," who deliberately incur losses. Eventually, the prices of such shares collapse collapse and the subsequent purchasers are and the subsequent purchasers are left to sell at nominal values. According to the Assessing Officer, the entire at nominal values. According to the Assessing Officer, the entire at nominal values. According to the Assessing Officer, the entire chain of allotment of shares, manipulation of prices, and chain of allotment of shares, manipulation of prices, and chain of allotment of shares, manipulation of prices, and subsequent offloading is orchestrated and controlled by a handful subsequent offloading is orchestrated and controlled by a handful subsequent offloading is orchestrated and controlled by a handful of operators.
2.4 With specific reference to the scrip of With specific reference to the scrip of Action Financial Services Action Financial Services Pvt. Ltd., the Assessing Officer recorded that the value of its shares , the Assessing Officer recorded that the value of its shares , the Assessing Officer recorded that the value of its shares had witnessed an unusual fluctuation had witnessed an unusual fluctuation—rising from rising from ₹1.54 on 01.04.2007 to ₹48.90 on 11.01.2008, thereafter falling to 48.90 on 11.01.2008, thereafter falling to 48.90 on 11.01.2008, thereafter falling to ₹7.70 on 31.10.2008, and once again rising to 31.10.2008, and once again rising to ₹49.50 on 24.03.2011. The 49.50 on 24.03.2011. The Assessing Officer reproduced the financial results of the said Assessing Officer reproduced the financial results of the said Assessing Officer reproduced the financial results of the said company for various years and noted that there was no company for various years and noted that there was no company for various years and noted that there was no commensurate or substantial change in its financial performance or commensurate or substantial change in its financial performance or commensurate or substantial change in its financial performance or business activities which could justify such a sharp escalation in iness activities which could justify such a sharp escalation in iness activities which could justify such a sharp escalation in the share price. In the absence of any fundamental factors the share price. In the absence of any fundamental factors the share price. In the absence of any fundamental factors supporting the abnormal rise, the Assessing Officer concluded that supporting the abnormal rise, the Assessing Officer concluded that supporting the abnormal rise, the Assessing Officer concluded that the assessee had introduced his unaccounted income in a the assessee had introduced his unaccounted income in a the assessee had introduced his unaccounted income in a premeditated and structured manner through the aforesaid ed and structured manner through the aforesaid ed and structured manner through the aforesaid transactions. The relevant finding of the Assessing Officer is The relevant finding of the Assessing Officer is The relevant finding of the Assessing Officer is reproduced as under: reproduced as under:
“16. This is a direct evidence that assessee's share of M/s Action 16. This is a direct evidence that assessee's share of M/s Action 16. This is a direct evidence that assessee's share of M/s Action Financial Services (India) Ltd was artificially hiked to c Financial Services (India) Ltd was artificially hiked to c Financial Services (India) Ltd was artificially hiked to create non- genuine LTCG to you along with other beneficiaries. It was : noticed genuine LTCG to you along with other beneficiaries. It was : noticed genuine LTCG to you along with other beneficiaries. It was : noticed that share price of M/s Action Financial Services (India) Ltd. rose that share price of M/s Action Financial Services (India) Ltd. rose that share price of M/s Action Financial Services (India) Ltd. rose from Rs. 1.54. on 1st April, 2007 to Rs. 48.9 on 11th Jan. 2008 and from Rs. 1.54. on 1st April, 2007 to Rs. 48.9 on 11th Jan. 2008 and from Rs. 1.54. on 1st April, 2007 to Rs. 48.9 on 11th Jan. 2008 and dipped to Rs.7.7 on 31st Oct., 2008 and r dipped to Rs.7.7 on 31st Oct., 2008 and rose again to Rs. 49.5 on ose again to Rs. 49.5 on 24th March, 2011. All these are indications that the LTCG earned is 24th March, 2011. All these are indications that the LTCG earned is 24th March, 2011. All these are indications that the LTCG earned is not genuine and this is also a circumstantial evidence. From the facts not genuine and this is also a circumstantial evidence. From the facts not genuine and this is also a circumstantial evidence. From the facts mentioned above it is clear that the assessee had prior knowledge of mentioned above it is clear that the assessee had prior knowledge of mentioned above it is clear that the assessee had prior knowledge of share price rigging of share price rigging of M/s Action Financial Services (India) Ltd and M/s Action Financial Services (India) Ltd and had purchased them. Under these circumstances, I hold that the had purchased them. Under these circumstances, I hold that the had purchased them. Under these circumstances, I hold that the assessee has introduced his income from undisclosed sources in a assessee has introduced his income from undisclosed sources in a assessee has introduced his income from undisclosed sources in a planned manner through colourable planned manner through colourable device.” 2.5 The Assessing Officer, relying upon the findings and The Assessing Officer, relying upon the findings and The Assessing Officer, relying upon the findings and recommendations of the Investigation Wing arising out of search recommendations of the Investigation Wing arising out of search recommendations of the Investigation Wing arising out of search and inquiries conducted on various brokers and operators, held and inquiries conducted on various brokers and operators, held and inquiries conducted on various brokers and operators, held that the transactions entered into by the assessee were in the that the transactions entered into by the assessee were in the that the transactions entered into by the assessee were in the nature of accommodation entries. Consequently, the Assessing ommodation entries. Consequently, the Assessing ommodation entries. Consequently, the Assessing Officer treated the entire sale consideration of Officer treated the entire sale consideration of ₹ ₹14,77,822/- as unexplained cash credit within the meaning of Section 68 of the unexplained cash credit within the meaning of Section 68 of the unexplained cash credit within the meaning of Section 68 of the Act. In addition thereto, a further sum representing commission at Act. In addition thereto, a further sum representing commission at Act. In addition thereto, a further sum representing commission at 2%, amounting to ₹29,556/-, was also brought to tax as , was also brought to tax as the rate of 2%, amounting to unexplained expenditure under Section 69C of the Act. unexplained expenditure under Section 69C of the Act. unexplained expenditure under Section 69C of the Act.
2.6 The ld. CIT(A) sustained the additions reasoning that: (a) CIT(A) sustained the additions reasoning that: (a) CIT(A) sustained the additions reasoning that: (a) surrounding circumstances, human conduct and preponderance of surrounding circumstances, human conduct and preponderance of surrounding circumstances, human conduct and preponderance of probabilities indicate probabilities indicated non-genuineness; (b) the assessee failed to genuineness; (b) the assessee failed to prove the “creditworthiness” of the company whose shares were prove the “creditworthiness” of the company whose shares were prove the “creditworthiness” of the company whose shares were traded; and (c) Investigation Wing findings on penny-stock traded; and (c) Investigation Wing findings on penny traded; and (c) Investigation Wing findings on penny operators supported the AO. Reliance was placed, inter alia, on operators supported the AO. Reliance was placed, inter alia, on operators supported the AO. Reliance was placed, inter alia, on Sumati Dayal v. CIT(supra (supra) and the Calcutta High Court decision in and the Calcutta High Court decision in PCIT v. Swati Bajaj & Ors(supra). PCIT v. Swati Bajaj & Ors(supra). The relevant finding of the Ld. The relevant finding of the Ld. CIT(A) is reproduced as under: CIT(A) is reproduced as under:
“6.0 Decision: 6.0 Decision:- 6. The shares of M/s Action Financial Services (1) Ltd were 6. The shares of M/s Action Financial Services (1) Ltd were 6. The shares of M/s Action Financial Services (1) Ltd were purchased by the assesse in 2007 for an purchased by the assesse in 2007 for an amount of Rs.11,76,745 amount of Rs.11,76,745 and were sold in FY 2010 and were sold in FY 2010-2011 on different dates with amount 2011 on different dates with amount totalling up to Rs. 14,77, 822. The Assessing Officer in assessment totalling up to Rs. 14,77, 822. The Assessing Officer in assessment totalling up to Rs. 14,77, 822. The Assessing Officer in assessment order has added the Total sale amount of Rs. 14,77,822/ order has added the Total sale amount of Rs. 14,77,822/ order has added the Total sale amount of Rs. 14,77,822/- by way of Cash Credit u/s. 68 of the IT Act, 19 Cash Credit u/s. 68 of the IT Act, 1961 as the scrip was a penny 61 as the scrip was a penny scip. On perusal of the contents of the assessment order, statements On perusal of the contents of the assessment order, statements On perusal of the contents of the assessment order, statements recorded by Investigation as well as submission made during the recorded by Investigation as well as submission made during the recorded by Investigation as well as submission made during the course of the present proceedings, it is to note that the appellant course of the present proceedings, it is to note that the appellant course of the present proceedings, it is to note that the appellant invested in the company viz invested in the company viz. M/s. M/s Action Financial Services (I) . M/s. M/s Action Financial Services (I) Ltd. The appellant has contended that sales were through banking The appellant has contended that sales were through banking The appellant has contended that sales were through banking channel and he has submitted contract notes, bank statements and channel and he has submitted contract notes, bank statements and channel and he has submitted contract notes, bank statements and therefore, the same are verifiable. Further assesse has bought and therefore, the same are verifiable. Further assesse has bought and therefore, the same are verifiable. Further assesse has bought and sold the shares in sold the shares in his normal course of Trading and hence it cannot his normal course of Trading and hence it cannot be considered as Trading in Penny Stocks under any circumstance. be considered as Trading in Penny Stocks under any circumstance. be considered as Trading in Penny Stocks under any circumstance. The contention of the appellant is that assesse has bought shares at The contention of the appellant is that assesse has bought shares at The contention of the appellant is that assesse has bought shares at the rate of Rs. 31.83 (purchased on 23/10/2007), Rs. 29.27 the rate of Rs. 31.83 (purchased on 23/10/2007), Rs. 29.27 the rate of Rs. 31.83 (purchased on 23/10/2007), Rs. 29.27 (purchased on (purchased on 25/10/2007), and Rs. 37.24 (purchased on 25/10/2007), and Rs. 37.24 (purchased on 15/11/2007) along with shares of other companies through his 15/11/2007) along with shares of other companies through his 15/11/2007) along with shares of other companies through his broker. Subsequently, the shares were sold on different dates during broker. Subsequently, the shares were sold on different dates during broker. Subsequently, the shares were sold on different dates during FY 2010-11 at different rates ranging from Rs. 34 per share to Rs. 44 11 at different rates ranging from Rs. 34 per share to Rs. 44 11 at different rates ranging from Rs. 34 per share to Rs. 44 per share.
The AO in his order has discussed the finding of the report of the AO in his order has discussed the finding of the report of the AO in his order has discussed the finding of the report of the Directorate of Investigation, Mumbai In respect of this particular scrip, Directorate of Investigation, Mumbai In respect of this particular scrip, Directorate of Investigation, Mumbai In respect of this particular scrip, the AO has mentioned that share price moved from Rs. 1.54 on the AO has mentioned that share price moved from Rs. 1.54 on the AO has mentioned that share price moved from Rs. 1.54 on 01.04.2007 to a high of Rs. 48.9 on 11.01.2008 and then f 01.04.2007 to a high of Rs. 48.9 on 11.01.2008 and then f 01.04.2007 to a high of Rs. 48.9 on 11.01.2008 and then fell back to Rs. 7.7 on 31.10.2008 and then rose to 49.5 on 24.03.2011.Finally Rs. 7.7 on 31.10.2008 and then rose to 49.5 on 24.03.2011.Finally Rs. 7.7 on 31.10.2008 and then rose to 49.5 on 24.03.2011.Finally rejecting the averments of the appellant that the impugned rejecting the averments of the appellant that the impugned rejecting the averments of the appellant that the impugned transactions were genuine transactions with all documentary transactions were genuine transactions with all documentary transactions were genuine transactions with all documentary evidences and the appellant has suffered loss instead of ea evidences and the appellant has suffered loss instead of ea evidences and the appellant has suffered loss instead of earning long term capital gains, the AO has held that term capital gains, the AO has held that- Here, it is important to mention that it is very naive to believe that the Here, it is important to mention that it is very naive to believe that the Here, it is important to mention that it is very naive to believe that the transactions transactions transactions entered entered entered into into into through through through banking banking banking channel channel channel proves proves proves creditworthiness, identity and genuineness of the transactions. creditworthiness, identity and genuineness of the transactions. creditworthiness, identity and genuineness of the transactions. Necessarily accommodation entries are an exercise of introducing rily accommodation entries are an exercise of introducing rily accommodation entries are an exercise of introducing unaccounted money or reducing profit by buying exempt LTC gain / unaccounted money or reducing profit by buying exempt LTC gain / unaccounted money or reducing profit by buying exempt LTC gain / loss to avoid the legitimate tax liability and therefore, to give it a loss to avoid the legitimate tax liability and therefore, to give it a loss to avoid the legitimate tax liability and therefore, to give it a colour of genuinity. The documentary and circumstantial eviden colour of genuinity. The documentary and circumstantial eviden colour of genuinity. The documentary and circumstantial evidences collected by the AO and the human conduct and probabilities in this collected by the AO and the human conduct and probabilities in this collected by the AO and the human conduct and probabilities in this case stare at the face of the appellant as to why it invested in the case stare at the face of the appellant as to why it invested in the case stare at the face of the appellant as to why it invested in the company which did not have a proven track record of financial company which did not have a proven track record of financial company which did not have a proven track record of financial soundness. Therefore, a higher burden lies on the app soundness. Therefore, a higher burden lies on the app soundness. Therefore, a higher burden lies on the appellant to establish the genuineness of the transaction under consideration. establish the genuineness of the transaction under consideration. establish the genuineness of the transaction under consideration. Here, the appellant has miserably failed to do so. The assessee does Here, the appellant has miserably failed to do so. The assessee does Here, the appellant has miserably failed to do so. The assessee does not and cannot dispute the fact that the shares of the company which not and cannot dispute the fact that the shares of the company which not and cannot dispute the fact that the shares of the company which he had dealt with were insignificant in va he had dealt with were insignificant in value prior to their trading. If lue prior to their trading. If such was the situation, it is the appellant who had to establish that such was the situation, it is the appellant who had to establish that such was the situation, it is the appellant who had to establish that the price rise was genuine and consequently, they are entitled to the price rise was genuine and consequently, they are entitled to the price rise was genuine and consequently, they are entitled to claim LTCG on their transaction. Until and unless the initial burden claim LTCG on their transaction. Until and unless the initial burden claim LTCG on their transaction. Until and unless the initial burden cast upon the appell cast upon the appellant is discharged, the onus does not shift to the ant is discharged, the onus does not shift to the revenue to prove otherwise. The appellant cannot be heard to say revenue to prove otherwise. The appellant cannot be heard to say revenue to prove otherwise. The appellant cannot be heard to say that their claim has to be examined only based upon the documents that their claim has to be examined only based upon the documents that their claim has to be examined only based upon the documents produced by it namely bank details/statements, the purchase/sell produced by it namely bank details/statements, the purchase/sell produced by it namely bank details/statements, the purchase/sell documents, the details of the D the details of the D-mat Account, etc. The appellant has mat Account, etc. The appellant has lost sight of an important fact that when a claim is made for LTCG, lost sight of an important fact that when a claim is made for LTCG, lost sight of an important fact that when a claim is made for LTCG, the onus was on him to prove that credit worthiness of the company the onus was on him to prove that credit worthiness of the company the onus was on him to prove that credit worthiness of the company whose shares he had dealt with, the genuineness of the price ri whose shares he had dealt with, the genuineness of the price ri whose shares he had dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. which is undoubtedly alarming that to within a short span of time. which is undoubtedly alarming that to within a short span of time. Therefore, unless and until the appellant discharges such burden of Therefore, unless and until the appellant discharges such burden of Therefore, unless and until the appellant discharges such burden of proof, the addition made by the assessing officer cannot be faulted. proof, the addition made by the assessing officer cannot be faulted. proof, the addition made by the assessing officer cannot be faulted. The appellant The appellant has, however, failed to provide any has, however, failed to provide any reasonable, cogent and valid reasonable, cogent and valid evidences/arguments/contentions advanced by him even in the evidences/arguments/contentions advanced by him even in the evidences/arguments/contentions advanced by him even in the instant appeal so as to prove the creditworthiness of the company in instant appeal so as to prove the creditworthiness of the company in instant appeal so as to prove the creditworthiness of the company in which he dealt in and also to counter the AO's decision in respect of which he dealt in and also to counter the AO's decision in respect of which he dealt in and also to counter the AO's decision in respect of genuineness of the transact genuineness of the transaction to the satisfaction of a fact ion to the satisfaction of a fact-finding authority - something which the material on record does not justify something which the material on record does not justify something which the material on record does not justify and something which is clearly missing. On the contrary, there is and something which is clearly missing. On the contrary, there is and something which is clearly missing. On the contrary, there is enough material on record to negate the claim of genuineness of the enough material on record to negate the claim of genuineness of the enough material on record to negate the claim of genuineness of the transaction. Genuineness of the transaction is to be examined in the Genuineness of the transaction is to be examined in the Genuineness of the transaction is to be examined in the light of ground realities and that is precisely what the AO has done. light of ground realities and that is precisely what the AO has done. light of ground realities and that is precisely what the AO has done. Therefore, it has been rightly held by the AO that the transaction of Therefore, it has been rightly held by the AO that the transaction of Therefore, it has been rightly held by the AO that the transaction of purchasing the shares of M/s Action Financial Services (1) purchasing the shares of M/s Action Financial Services (1) purchasing the shares of M/s Action Financial Services (1) Ltd. without knowing the financial credentials of the company, was sham, without knowing the financial credentials of the company, was sham, without knowing the financial credentials of the company, was sham, bogus, not genuine and with an intention to buy an accommodation bogus, not genuine and with an intention to buy an accommodation bogus, not genuine and with an intention to buy an accommodation entry of exempt LTCG to evade the legitimate tax liability ultimately. entry of exempt LTCG to evade the legitimate tax liability ultimately. entry of exempt LTCG to evade the legitimate tax liability ultimately. It is held that the aforesaid transaction of pu It is held that the aforesaid transaction of purchase of penny stock rchase of penny stock shares for lesser amount and the sale of the shares for higher shares for lesser amount and the sale of the shares for higher shares for lesser amount and the sale of the shares for higher amount fell within the ambit of adventure in the nature of trade and amount fell within the ambit of adventure in the nature of trade and amount fell within the ambit of adventure in the nature of trade and the assessee had profited which comes under the ambit of business the assessee had profited which comes under the ambit of business the assessee had profited which comes under the ambit of business income. Further, the findings of the income. Further, the findings of the A.O. are in line with the modus A.O. are in line with the modus operandi given in the Investigation report of the Investigation Wing. operandi given in the Investigation report of the Investigation Wing. operandi given in the Investigation report of the Investigation Wing. The appellant has further contended that the AO has made addition The appellant has further contended that the AO has made addition The appellant has further contended that the AO has made addition on conjectures and surmises and without controverting or negating on conjectures and surmises and without controverting or negating on conjectures and surmises and without controverting or negating the information or de the information or details filed by him in support of his claim for tails filed by him in support of his claim for availing exemption u/s.10(38) of the Act. It is important to mention availing exemption u/s.10(38) of the Act. It is important to mention availing exemption u/s.10(38) of the Act. It is important to mention that in the instant case, the appellant had dealt in penny stock scrip. that in the instant case, the appellant had dealt in penny stock scrip. that in the instant case, the appellant had dealt in penny stock scrip. The Investigation Wing has unearthed the modus operandi involved The Investigation Wing has unearthed the modus operandi involved The Investigation Wing has unearthed the modus operandi involved in dealing such penny stock scrip. The information of the dealing such penny stock scrip. The information of the dealing such penny stock scrip. The information of the Investigation Wing states that the investigation has not commenced Investigation Wing states that the investigation has not commenced Investigation Wing states that the investigation has not commenced from the individuals but it has commenced who had dealt with the from the individuals but it has commenced who had dealt with the from the individuals but it has commenced who had dealt with the penny stocks, concept of working backwards. This is a very penny stocks, concept of working backwards. This is a very penny stocks, concept of working backwards. This is a very significant factor to be remembered. Therefore, there has been t factor to be remembered. Therefore, there has been t factor to be remembered. Therefore, there has been absolute anonymity of the assessee in the process of investigation. absolute anonymity of the assessee in the process of investigation. absolute anonymity of the assessee in the process of investigation. The endeavour of the department is to examine the "modus operandi" The endeavour of the department is to examine the "modus operandi" The endeavour of the department is to examine the "modus operandi" adopted and in that process now, seek to identify the assessees who adopted and in that process now, seek to identify the assessees who adopted and in that process now, seek to identify the assessees who have benefited on account of such "modus operandi". The AO in the have benefited on account of such "modus operandi". The AO in the have benefited on account of such "modus operandi". The AO in the impugned assessment order has highlighted the investigation impugned assessment order has highlighted the investigation impugned assessment order has highlighted the investigation conducted in such penny stock after describing the general modus conducted in such penny stock after describing the general modus conducted in such penny stock after describing the general modus operandi of accommodation entry by way of bogus capital gain and operandi of accommodation entry by way of bogus capital gain and operandi of accommodation entry by way of bogus capital gain and providing providing providing of of of bogus bogus bogus capital capital capital gain gain gain entries, entries, entries, lack lack lack of of of financial financial financial fundamentals of the company of which shares the appellant has fundamentals of the company of which shares the appellant has fundamentals of the company of which shares the appellant has traded, price movement, jack up of share price of the company M/s traded, price movement, jack up of share price of the company M/s traded, price movement, jack up of share price of the company M/s Action Financial Services (1) Ltd etc. Action Financial Services (1) Ltd etc. Based on those foundational fa Based on those foundational facts, the department has adopted the cts, the department has adopted the concept of "working backward" leading to the appellant. The AO has concept of "working backward" leading to the appellant. The AO has concept of "working backward" leading to the appellant. The AO has taken into consideration the surrounding circumstances, the normal taken into consideration the surrounding circumstances, the normal taken into consideration the surrounding circumstances, the normal human conduct of a prudent investor and the preponderance of human conduct of a prudent investor and the preponderance of human conduct of a prudent investor and the preponderance of probabilities that may sp probabilities that may spill over to negate the claim for exception ill over to negate the claim for exception made by the appellant. Therefore, the department was fully justified made by the appellant. Therefore, the department was fully justified made by the appellant. Therefore, the department was fully justified in taking note of the prevailing circumstances to decide against the in taking note of the prevailing circumstances to decide against the in taking note of the prevailing circumstances to decide against the appellant.
All these facts give credence to unreliability of entire transa All these facts give credence to unreliability of entire transa All these facts give credence to unreliability of entire transaction of shares giving rise to such capital gains ratio laid down by Hon'ble shares giving rise to such capital gains ratio laid down by Hon'ble shares giving rise to such capital gains ratio laid down by Hon'ble Supreme Court in case of Sumati Dayal vs. CIT case. Though the Supreme Court in case of Sumati Dayal vs. CIT case. Though the Supreme Court in case of Sumati Dayal vs. CIT case. Though the appellant appellant appellant has has has received received received amount amount amount through through through banking banking banking channels, channels, channels, transactions cannot be treated as genuine in presence of transactions cannot be treated as genuine in presence of transactions cannot be treated as genuine in presence of overwhelming evidences put forward by Revenue. Reliance is also rwhelming evidences put forward by Revenue. Reliance is also rwhelming evidences put forward by Revenue. Reliance is also placed on judgment in case of Nipun Builders and Developers Pvt. placed on judgment in case of Nipun Builders and Developers Pvt. placed on judgment in case of Nipun Builders and Developers Pvt. Ltd. where it was held that it is duty of Tribunal to scratch surface Ltd. where it was held that it is duty of Tribunal to scratch surface Ltd. where it was held that it is duty of Tribunal to scratch surface and probe documentary evidence in depth, in light of conduct and probe documentary evidence in depth, in light of conduct and probe documentary evidence in depth, in light of conduct of appellant and other surrounding circumstances in order to see appellant and other surrounding circumstances in order to see appellant and other surrounding circumstances in order to see whether assessee is liable to provisions of section 68 or not. Similarly whether assessee is liable to provisions of section 68 or not. Similarly whether assessee is liable to provisions of section 68 or not. Similarly bank statements, demat a/c. statement, STT paid, broker's statement bank statements, demat a/c. statement, STT paid, broker's statement bank statements, demat a/c. statement, STT paid, broker's statement provided by appellant to prove genuineness of tra provided by appellant to prove genuineness of transaction cannot be nsaction cannot be considered in view of judgment of Hon'ble Court in case of Pratham considered in view of judgment of Hon'ble Court in case of Pratham considered in view of judgment of Hon'ble Court in case of Pratham Telecom India Pvt. Ltd. wherein it was stated that bank statement, Telecom India Pvt. Ltd. wherein it was stated that bank statement, Telecom India Pvt. Ltd. wherein it was stated that bank statement, etc. is not sufficient enough to discharge burden. etc. is not sufficient enough to discharge burden. The latest decision of the Calcutta High Court in The latest decision of the Calcutta High Court in the case of PCIT v. the case of PCIT v. Swati Bajaj & Others which is in favour of the Revenue is discussed Swati Bajaj & Others which is in favour of the Revenue is discussed Swati Bajaj & Others which is in favour of the Revenue is discussed as under: "S. 68: Cash Credits "S. 68: Cash Credits-Penny Stock-Capital gains Capital gains-Shares with increased value of about 2823% increased value of about 2823%-Genuineness of price hike to be Genuineness of price hike to be established-Onus on the assessee Onus on the assessee-Order of Tribunal is reversed er of Tribunal is reversed- Addition as cash credit is affirmed Addition as cash credit is affirmed- Revision is held to be valid. [S. Revision is held to be valid. [S. S.10(38), 45, 263] S.10(38), 45, 263] The assessee had purchased 50,000 shares of the Surabhi The assessee had purchased 50,000 shares of the Surabhi The assessee had purchased 50,000 shares of the Surabhi Chemicals and Investment Ltd for Rs.1,00,000/ Chemicals and Investment Ltd for Rs.1,00,000/- on 16.03.2012 and on 16.03.2012 and 14.08.2012. Soon 14.08.2012. Soon after the expiry of the period to become eligible for after the expiry of the period to become eligible for long term capital gains, the assessee sold those shares for Rs. long term capital gains, the assessee sold those shares for Rs. long term capital gains, the assessee sold those shares for Rs. 29,23,500/- Sales were effected during the period from 04.12.2013 Sales were effected during the period from 04.12.2013 Sales were effected during the period from 04.12.2013 to 07.12.2013 and the long term capital gains (LTCG) was computed to 07.12.2013 and the long term capital gains (LTCG) was computed to 07.12.2013 and the long term capital gains (LTCG) was computed for Rs. 28,23,500/ . 28,23,500/-. The assessee claimed the capital gains as . The assessee claimed the capital gains as exempt u/s. 10(38) of the Act. The Assessing officer held that within exempt u/s. 10(38) of the Act. The Assessing officer held that within exempt u/s. 10(38) of the Act. The Assessing officer held that within a short span to time of 17 to 21 months, the Assessee managed to a short span to time of 17 to 21 months, the Assessee managed to a short span to time of 17 to 21 months, the Assessee managed to sell the shares with increased value of about 2823% that to when sell the shares with increased value of about 2823% that to when sell the shares with increased value of about 2823% that to when the general market trend was recessive. Relying on the report of general market trend was recessive. Relying on the report of general market trend was recessive. Relying on the report of investigation wing the Assessing Officer denied the exemption and investigation wing the Assessing Officer denied the exemption and investigation wing the Assessing Officer denied the exemption and assessed the receipt u/s. 68 of the Act. The CIT(A) dismissed the assessed the receipt u/s. 68 of the Act. The CIT(A) dismissed the assessed the receipt u/s. 68 of the Act. The CIT(A) dismissed the appeal of the Assessee. On appeal the Income appeal of the Assessee. On appeal the Income-tax Appellate tax Appellate Tribunal passed a common order in 90 appeals pertaining to penny stocks passed a common order in 90 appeals pertaining to penny stocks passed a common order in 90 appeals pertaining to penny stocks favouring the assessees. Revenue has filed appeals before the High favouring the assessees. Revenue has filed appeals before the High favouring the assessees. Revenue has filed appeals before the High Court Honourable High Court held that the onus is on the assessee to Court Honourable High Court held that the onus is on the assessee to Court Honourable High Court held that the onus is on the assessee to establish the genuineness of the price hike. Me establish the genuineness of the price hike. Merely demonstrating the rely demonstrating the financials of the company, volume of trade, transactions through financials of the company, volume of trade, transactions through financials of the company, volume of trade, transactions through banking channels, inter alia, will not suffice. The Assessee has to banking channels, inter alia, will not suffice. The Assessee has to banking channels, inter alia, will not suffice. The Assessee has to prove that the price of the share was not manipulated. Honourable prove that the price of the share was not manipulated. Honourable prove that the price of the share was not manipulated. Honourable High Court also held that the Trib High Court also held that the Tribunal committed a serious error in unal committed a serious error in setting aside the orders of the CIT(A) who had affirmed the orders of setting aside the orders of the CIT(A) who had affirmed the orders of setting aside the orders of the CIT(A) who had affirmed the orders of the Assessing Officer and equally the Tribunal committed a serious the Assessing Officer and equally the Tribunal committed a serious the Assessing Officer and equally the Tribunal committed a serious error both on law and fact in interfering with the assumption of error both on law and fact in interfering with the assumption of error both on law and fact in interfering with the assumption of jurisdiction by the jurisdiction by the Commissioner under Section 263 of the Act. Commissioner under Section 263 of the Act. (Arising out of Kol/2018 dt. 20 (Arising out of Kol/2018 dt. 20-6-2019 (SMC) (AY. 2019 (SMC) (AY. 2014-15) (ITA No. 6 of 2022 dated June 14, 2022). PCIT v. Swati 15) (ITA No. 6 of 2022 dated June 14, 2022). PCIT v. Swati 15) (ITA No. 6 of 2022 dated June 14, 2022). PCIT v. Swati Bajaj and Ors. (Cal.) (HC). Bajaj and Ors. (Cal.) (HC). Hence, considering the facts of the assessee's case and t Hence, considering the facts of the assessee's case and t Hence, considering the facts of the assessee's case and the preponderance of probabilities is against the assessee and also in preponderance of probabilities is against the assessee and also in preponderance of probabilities is against the assessee and also in view of the reliance made on the above case laws, the entire capital view of the reliance made on the above case laws, the entire capital view of the reliance made on the above case laws, the entire capital gain has to be treated as fictitious. In view of the above facts and gain has to be treated as fictitious. In view of the above facts and gain has to be treated as fictitious. In view of the above facts and discussion, all the grounds of appeal raised in discussion, all the grounds of appeal raised in this regard are this regard are hereby dismissed. dismissed.”
3. On these facts, the questions that arise are On these facts, the questions that arise are that that :
(i) Whether, on the material on record, the Department has (i) Whether, on the material on record, the Department has (i) Whether, on the material on record, the Department has established a sufficient nexus between the assessee’s AFSIL established a sufficient nexus between the assessee’s AFSIL established a sufficient nexus between the assessee’s AFSIL transactions and any alleged price transactions and any alleged price-rigging/accommodation rigging/accommodation- entry operation so as to justify addition under Section 68 of entry operation so as to justify addition under Section 68 of entry operation so as to justify addition under Section 68 of the the entire entire sale sale pr proceeds; (ii) Whether the approach of resting the addition solely on (ii) Whether the approach of resting the addition solely on (ii) Whether the approach of resting the addition solely on generic “modus operandi” and historic price charts generic “modus operandi” and historic price charts generic “modus operandi” and historic price charts—without specific incriminating material qua this assessee or his specific incriminating material qua this assessee or his specific incriminating material qua this assessee or his counter-parties— —meets meets the the legal legal standard; standard; and and (iii) Whether the estimate (iii) Whether the estimated commission addition under Section d commission addition under Section 69C can be sustained absent evidence of any outgo. 69C can be sustained absent evidence of any outgo. 69C can be sustained absent evidence of any outgo.
We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record. the relevant materials on record. It is no doubt true that in cases of It is no doubt true that in cases of alleged ‘penny’ stock transactions, stock transactions, Hon’ble Courts have repeatedly held that the test of human conduct, surrounding circumstances and human conduct, surrounding circumstances and human conduct, surrounding circumstances and preponderance of probability preponderance of probability must be applied, and mere production must be applied, and mere production of contract notes, bank statements or demat account entries does of contract notes, bank statements or demat account entries does of contract notes, bank statements or demat account entries does not by itself establish gen not by itself establish genuineness of the transaction. ( uineness of the transaction. (CIT v. Durga Prasad More (82 ITR 540, SC); (82 ITR 540, SC); Sumati Dayal v. CIT Sumati Dayal v. CIT (214 ITR 801, SC); PCIT v. Swati Bajaj & Ors. PCIT v. Swati Bajaj & Ors. (Cal HC, 2022)). At the same time, it At the same time, it is equally settled that suspicion, however strong, cannot substitute is equally settled that suspicion, however strong, cannot substitute is equally settled that suspicion, however strong, cannot substitute legal proof, and additions cannot be sustained on general modus f, and additions cannot be sustained on general modus f, and additions cannot be sustained on general modus operandi or broad-brush findings without any cogent material brush findings without any cogent material brush findings without any cogent material linking the assessee to such alleged manipulation. (Umacharan linking the assessee to such alleged manipulation. linking the assessee to such alleged manipulation. Shaw & Bros. v. CIT, 37 ITR 271 (SC); , 37 ITR 271 (SC); Daulat Ram Rawatmull v. CIT Daulat Ram Rawatmull v. CIT, 87 ITR 349 (SC)). Swati Bajaj Swati Bajaj (Cal HC, 2022) upholds additions in (Cal HC, 2022) upholds additions in penny-stock cases where the stock cases where the price surge is demonstrably price surge is demonstrably manipulated and the assessee fails to offer a and the assessee fails to offer a plausible, fact plausible, fact-specific explanation. The Income . The Income-Tax Authorities are not permitted to Tax Authorities are not permitted to make additions based merely on the scrip being tainted; a fact-specific additions based merely on the scrip being tainted; additions based merely on the scrip being tainted; nexus must be established. must be established.
We find that in this case assessee had purchased shares of M/s We find that in this case assessee had purchased shares of M/s We find that in this case assessee had purchased shares of M/s Action Financial Services Pvt. Ltd. @ Rs.31.85 (purchased on Action Financial Services Pvt. Ltd. @ Rs.31.85 (purchased on Action Financial Services Pvt. Ltd. @ Rs.31.85 (purchased on 23.10.2007); Rs.29.27 (purcha Rs.29.27 (purchased on 25.10.2007) sed on 25.10.2007); and Rs.27.24 (purchased on 15.11.2007) along with (purchased on 15.11.2007) along with shares of other companies of other companies, through share brokers M/s SB Securities Pvt. Ltd. The assessee through share brokers M/s SB Securities Pvt. Ltd. The assessee through share brokers M/s SB Securities Pvt. Ltd. The assessee filed details contract note filed details contract notes which are available on Paper Book page which are available on Paper Book pages 15 to 17. The assessee a The assessee also filed a copy of demat statement to filed a copy of demat statement to support that shares were purchased support that shares were purchased through stock exchange. A stock exchange. A copy of such demat statement is placed on record. The assessee copy of such demat statement is placed on record. copy of such demat statement is placed on record. claimed to have sold the shares in the financial year 2010-11 from claimed to have sold the shares in the financial year 2010 claimed to have sold the shares in the financial year 2010 October 2010 to March 2011 October 2010 to March 2011 for a total sale consideration of for a total sale consideration of Rs.14,77,822/-.We find that the basis of the addition We find that the basis of the addition We find that the basis of the addition made by the AO and sustaining by the Ld. CIT(A) and sustaining by the Ld. CIT(A) is keeping in view is keeping in view surrounding circumstances, human conduct and preponderance human conduct and preponderance human conduct and preponderance of probability. The Ld. CIT(A) has The Ld. CIT(A) has firstly, held that assessee failed to establish held that assessee failed to establish creditworthiness of the company in which he invested. We are of creditworthiness of the company in which he invested. creditworthiness of the company in which he invested. opinion that while investing the assessee while investing the assessee was not required to not required to examine the creditworthiness of the company. T reditworthiness of the company. T reditworthiness of the company. The assessee according to his knowledge of t according to his knowledge of the share market for last 20 he share market for last 20 years, chose to invest in the said company chose to invest in the said company. The investment activity is a The investment activity is a risk oriented activity and therefore, it may result into sometime in risk oriented activity and therefore, it may result into sometime risk oriented activity and therefore, it may result into sometime profit or sometime may profit or sometime may result into loss. Secondly, the Ld. CIT(A) has loss. Secondly, the Ld. CIT(A) has relied on finding of the Investigation Wing ng of the Investigation Wing that the scrip in which the scrip in which assessee invested, was was operated by a group of accommodation entry operated by a group of accommodation entry operators but neither the Assessing Officer nor the Ld. CIT(A) has operators but neither the Assessing Officer nor the Ld. CIT(A) has operators but neither the Assessing Officer nor the Ld. CIT(A) has pointed out any specific search carried out on the operators who pointed out any specific search carried out on the operators who pointed out any specific search carried out on the operators who operated the shares of the M/s Action Financials the shares of the M/s Action Financials, nor involvement nor involvement of the assessee for obtaining benefit of long term capital gain of the assessee for obtaining benefit of long term capital gain of the assessee for obtaining benefit of long term capital gain through those operators has been brought on record. through those operators has been brought on record. through those operators has been brought on record.
5.1 The Assessing Officer and the Ld. CIT(A) has referred general The Assessing Officer and the Ld. CIT(A) has referred general The Assessing Officer and the Ld. CIT(A) has referred general statement of the searches which were carried out by the the searches which were carried out by the the searches which were carried out by the Investigation Wing Kolkata without any specific mention of the Kolkata without any specific mention of the Kolkata without any specific mention of the operator who controlled and managed the penny stock company operator who controlled and managed the penny stock company operator who controlled and managed the penny stock company M/s Action Financial India Ltd. As regard to surrounding M/s Action Financial India Ltd. As regard to surrounding M/s Action Financial India Ltd. As regard to surrounding circumstances, we find that the circumstances, we find that the Assessing Officer and the Ld. CIT(A) Assessing Officer and the Ld. CIT(A) has reported that shares of the company were rigged from Rs.1.54 has reported that shares of the company were rigged from Rs.1.54 has reported that shares of the company were rigged from Rs.1.54 to Rs.44 without corresponding financials but in the instant case to Rs.44 without corresponding financials but in the instant case to Rs.44 without corresponding financials but in the instant case assessee purchased the shares in the price range of the Rs.37 and assessee purchased the shares in the price range of the Rs.37 and assessee purchased the shares in the price range of the Rs.37 and sold in the price rang sold in the price range of Rs.44 which does not match with the match with the period of the price rigging from Rs.1.54 to RS.44. Further, the period of the price rigging from Rs.1.54 to RS.44. period of the price rigging from Rs.1.54 to RS.44. Assessing Officer as well as the learned CIT(A) proceeded on the Assessing Officer as well as the learned CIT(A) proceeded on the Assessing Officer as well as the learned CIT(A) proceeded on the premise that the motive of earning huge profit constitutes one of the premise that the motive of earning huge profit constitutes one of the premise that the motive of earning huge profit constitutes one of the relevant surrounding circumstances of human conduct. However, surrounding circumstances of human conduct. However, surrounding circumstances of human conduct. However, such presumption is wholly misplaced in the present case, such presumption is wholly misplaced in the present case, such presumption is wholly misplaced in the present case, inasmuch as, after allowing the benefit of indexation, the inasmuch as, after allowing the benefit of indexation, the inasmuch as, after allowing the benefit of indexation, the transaction has in fact resulted in a loss and not in any profit. transaction has in fact resulted in a loss and not in any profit transaction has in fact resulted in a loss and not in any profit Further, neither the AO nor the Ld. CIT(A) has brought on record AO nor the Ld. CIT(A) has brought on record any direct link of the assessee with any of the operator who rigged any direct link of the assessee with any of the operator who rigged any direct link of the assessee with any of the operator who rigged the prices of the company. Further, the AO held that purchases in the prices of the company. Further, the AO held that purchases in the prices of the company. Further, the AO held that purchases in case of penny stock companies are made normally through case of penny stock companies are made normally through case of penny stock companies are made normally through preferential allotmen preferential allotment or amalgamation route but in the instant t or amalgamation route but in the instant case assessee has purchased case assessee has purchased the shares on stock exchange the shares on stock exchange in normal course of his trading through his regular broker, a copy of normal course of his trading through his regular broker normal course of his trading through his regular broker the contract note and demat statement of the contract note and demat statement of which are available on which are available on the Paper Book. Furthe the Paper Book. Further in this case the holding period is also r in this case the holding period is also approximately four years as compared to short holding period of approximately four years as compared to short holding period approximately four years as compared to short holding period slightly more than one year slightly more than one year mentioned by the Assessing Officer mentioned by the Assessing Officer in the modus operandi. We are of the opinion th the modus operandi. We are of the opinion that merely particular at merely particular scrip is tainted; the assessee cannot be held guilty of converting he assessee cannot be held guilty of converting he assessee cannot be held guilty of converting undisclosed income and treating sale consideration as unexplained undisclosed income and treating sale consideration as unexplained undisclosed income and treating sale consideration as unexplained cash credit.
5.2 On a careful consideration of the material available on record, n a careful consideration of the material available on record, n a careful consideration of the material available on record, we find that neither the Assessing Officer nor the learned CIT(A) has we find that neither the Assessing Officer nor the learned C we find that neither the Assessing Officer nor the learned C been able to establish any direct nexus between the assessee and been able to establish any direct nexus between the assessee and been able to establish any direct nexus between the assessee and the alleged operators who are stated to have manipulated the prices the alleged operators who are stated to have manipulated the prices the alleged operators who are stated to have manipulated the prices of the shares of the company. No cogent evidence has been brought of the shares of the company. No cogent evidence has been brought of the shares of the company. No cogent evidence has been brought on record to demonstrate that the assessee had any role, on record to demonstrate that the assessee had on record to demonstrate that the assessee had participation, or even knowledge of such alleged price rigging. The participation, or even knowledge of such alleged price rigging. The participation, or even knowledge of such alleged price rigging. The mere reliance on general reports or the conduct of third parties, mere reliance on general reports or the conduct of third parties, mere reliance on general reports or the conduct of third parties, without linking the same to the assessee through credible evidence, without linking the same to the assessee through credible evidence, without linking the same to the assessee through credible evidence, cannot form the basis for drawing adverse in cannot form the basis for drawing adverse inference. It is a settled ference. It is a settled proposition in law that suspicion, however strong, cannot take the proposition in law that suspicion, however strong, cannot take the proposition in law that suspicion, however strong, cannot take the place of proof. In the absence of any material to show the assessee’s place of proof. In the absence of any material to show the assessee’s place of proof. In the absence of any material to show the assessee’s involvement in, or connivance with, the purported operators, the involvement in, or connivance with, the purported operators, the involvement in, or connivance with, the purported operators, the addition sustained merely on addition sustained merely on presumptions and surmises cannot be presumptions and surmises cannot be upheld. Our conclusion on facts of the case Our conclusion on facts of the case and in law and in law is summarised as under: as under:
(i) Mismatch between alleged rigging cycle and assessee’s trade Mismatch between alleged rigging cycle and assessee’s trade: Mismatch between alleged rigging cycle and assessee’s trade The AO’s rigging narrative stresses a meteoric rise from ₹1.54 to The AO’s rigging narrative stresses a meteoric rise from The AO’s rigging narrative stresses a meteoric rise from ~₹49 within 2007-08, a crash in late 08, a crash in late-2008, and a later rise by 2008, and a later rise by March 2011. The assessee March 2011. The assessee purchased shares in Oct in Oct–Nov 2007 at ₹27–₹37—not at nominal or preferential prices at nominal or preferential prices—and and sold in F.Y. 2010-11 at ₹34–₹44. Thus, the assessee’s entry price was already at . Thus, the assessee’s entry price was already at . Thus, the assessee’s entry price was already at a relatively elevated range; the alleged classic accommodation elatively elevated range; the alleged classic accommodation elatively elevated range; the alleged classic accommodation pattern—acquiring at throwaway prices via offline/preferential acquiring at throwaway prices via offline/preferential acquiring at throwaway prices via offline/preferential routes and exiting at many routes and exiting at many-fold increases shortly after the one fold increases shortly after the one-year mark—is absent. The is absent. The holding period of about four years holding period of about four years is inconsistent with the typical “buy istent with the typical “buy-rig-exit” cycle emphasized by the exit” cycle emphasized by the AO and cited modus operandi. AO and cited modus operandi.
(ii) Absence of assessee Absence of assessee-specific incriminating material specific incriminating material: Neither the assessment order nor the Neither the assessment order nor the ld CIT(A) identified ld CIT(A) identified (a) any operator, exit provider exit provider, or broker-level colluder connected with this connected with this assessee; (b) any statement statement implicating the assessee; or (c) any implicating the assessee; or (c) any cash trail/cash-back. The finding that “the assessee had prior knowledge . The finding that “the assessee had prior knowledge . The finding that “the assessee had prior knowledge of rigging” is conclusory conclusory. The Investigation Wing reports are . The Investigation Wing reports are generic; there is no confronted material nted material qua this assessee, nor any offer of qua this assessee, nor any offer of cross-examination of persons allegedly involved. of persons allegedly involved. (iii) Erroneous burden cast by Erroneous burden cast by the ld CIT(A): The ld CIT(A) CIT(A) CIT(A) faults faults faults the the the assessee assessee assessee for for for not not not proving proving proving the the the “creditworthiness of the company” whose shares were traded and “creditworthiness of the company” whose shares were traded and “creditworthiness of the company” whose shares were traded and the “genuineness of price rise”. the “genuineness of price rise”. In a secondary market trade secondary market trade on exchange through a SEBI exchange through a SEBI-registered broker and demat mechanism, registered broker and demat mechanism, the assessee is not required to establish the issuer’s financial not required to establish the issuer’s financial not required to establish the issuer’s financial strength as a condition precedent. as a condition precedent. The Department alleges he Department alleges price manipulation in the case in the case, but failed to produce specific material specific material showing the assessee’s participation or knowledge; absent that, showing the assessee’s participation or knowledge; absent that, showing the assessee’s participation or knowledge; absent that, requiring the assessee to justify market requiring the assessee to justify market-wide price formation is wide price formation is not permitted in law. (iv) Use of human probabilities Use of human probabilities—limits: The The principles principles in in Durga Prasad More(supra) (supra) and Sumati Dayal(supra) permit testing a story against human conduct, but permit testing a story against human conduct, but permit testing a story against human conduct, but they do not permit replacing proof with presumption. Here, the replacing proof with presumption. Here, the surrounding circumstances surrounding circumstances pressed by the AO/CIT(A) pressed by the AO/CIT(A)—that AFSIL is on a “penny stock” list, that its fundamentals did not justify stock” list, that its fundamentals did not justify stock” list, that its fundamentals did not justify price, and that some persons may have rigged it—remain price, and that some persons may have rigged it price, and that some persons may have rigged it background suspicion background suspicion. Without a linking fact to the assessee, the to the assessee, the addition fails the test in addition fails the test in Umacharan Shaw(supra) and and Daulat Ram Rawatmull(supra). (v) Effect of Swati Bajaj Swati Bajaj(supra)
The Hon’ble Calcutta High Court decision supports Revenue Calcutta High Court decision supports Revenue Calcutta High Court decision supports Revenue where (a) the price rise is extraordinary and inexplicable, (b) assessees are (a) the price rise is extraordinary and inexplicable, (b) (a) the price rise is extraordinary and inexplicable, (b) shown to be part of the arrangement shown to be part of the arrangement, and (c) the record reveals and (c) the record reveals contemporaneous incriminat contemporaneous incriminating material. In contrast, the present . In contrast, the present case involves purchase at already purchase at already-elevated prices elevated prices, long holding, modest sale range, and , and no assessee-specific incriminating material specific incriminating material. The ratio is therefore The ratio is therefore distinguishable on facts.
5.3 Accordingly, we set aside the Accordingly, we set aside the finding of lower authorities and of lower authorities and delete the addition made by the Assessing Officer. The grounds of delete the addition made by the Assessing Officer. The grounds of delete the addition made by the Assessing Officer. The grounds of appeal of the assessee are allowed. appeal of the assessee are allowed.
In the result, the appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on nounced in the open Court on 25 25/08/2025.