HEAVEN MAHENDRA SHAH,VILE PARLE (WEST) vs. ASST. CIT - 33(1), MUMBAI, BANDRA (EAST)

The issue in appeal is with regard to denying the exemption claimed u/s 10 (38) of the Act in the scrips Pearl Agriculture Ltd (PAL) and Pearl Electronics Ltd (PEL), on the ground that the said scrips are penny stocks and the capital gain is, therefore, bogus and in making the addition of the sale proceeds of the said scrips aggregating to Rs. 26,02,806/-as unexplained cash credit u/s 68 of the Act.

The Ld. DR argued and stands in favour of the orders of the revenue authorities. The Ld. DR specifically mentioned paras 4.11 and 4.12 of the impugned appellate order, which are extracted below: - 4.11 Reliance is also placed in the case of Principal Commissioner of Income tax v. Nand Kishore Agarwala*[2022] 143 taxmann.com 402 (Calcutta) wherein the Hon’ble High Court of Kolkata has again held that ‘Where assessee had stage managed transactions of sale of shares with object to plough back his unaccounted income in form of fictitious long-term capital gains (LTCG) and claim bogus exemption under section 10(38), such exemption denied by Assessing Officer by way of treating bogus LTCG in penny stock under purview of unexplained cash under section 68 and unexplained expenditure u/s 69C was justified’. 4.12 Therefore, basis the discussions in the above paras, it is held that the AO had extensively proved beyond doubt that the investment made by the appellant is nothing but a sham transaction in a penny stock company mainly with the intention of claiming bogus LTCG which is an exempt income and hence, going by the AO’s findings and as held by various courts as discussed in the above paras, the addition made by AO u/s68 is held correct and no infirmity is found in the order of AO. All grounds of appeal in this regard are dismissed.”

The Ld.AR further relied on the order of the co-ordinate bench of ITAT, Mumbai in the case of Poornima Ramesh Shenoy vs ITO date of pronouncement 23/08/2023. The relevant paragraph 8 is extracted below:- “8. It is pertinent to note that in the statement recorded of the Authorised Representative of the assessee during the assessment proceedings, it was specifically submitted that the assessee has never invested through preferential allotment and also disclosed the name and address of the broker, i.e. HDFC Securities Ltd. However, the AO without finding any fault with the evidence submitted by the assessee proceeded to treat the transaction as non-genuine and the long-term capital gains earned by the assessee as bogus. Further, we find that the SEBI vide its order dated 26/06/2020, had conducted an enquiry into the manipulation of the price of the scrip of Mystic Electronics Limited, by certain operators and the entities connected to such operators. From the perusal of the said order, which was furnished during the course of the hearing, we find that there is no allegation that the assessee has transacted with the alleged operators or their entities for earning the long-term capital gain of Rs.5,47,190. In the absence of any other allegation of the Revenue, we find no merits in the impugned order upholding the addition of Rs.5,47,190, made under section 68 of the Act and disallowing the exemption of long-term capital gains earned by the assessee. Accordingly, the grounds raised by the assessee are allowed.”

The Ld.AR further relied on the order of Hon’ble jurisdictional High Court in case of PCIT-31, Mumbai vs Indravadan Jain, HUF, of 2018, date of order 12/07/2023. The relevant paragraph 4 if reproduced as below: - “4. The A.O. did not accept respondent's claim of long term capital gain and added the same in respondent's income under Section 68 of the Act. While allowing the appeal filed by respondent, the CIT[A] deleted the addition made under Section 68 of the Act. The CIT[A] has observed that the A.O. himself has stated that SEBI had conducted independent enquiry in the case of the said broker and in the scrip of RFL through whom respondent had made the said transaction and it was conclusively proved that it was the said broker who had inflated the price of the said scrip in Heaven Mahendra Shah RFL. The CIT[A] also did not find anything wrong in respondent doing only one transaction with the said broker in the scrip of RFL. The CIT[A] came to the conclusion that respondent brought 3000 shares of RFL, on the floor of Kolkata Stock Exchange through registered share broker. In pursuance of purchase of shares the said broker had raised invoice and purchase price was paid by cheque and respondent's bank account has been debited. The shares were also transferred into respondent's Demat account where it remained for more than one year. After a period of one year the shares were sold by the said broker on various dates in the Kolkata Stock Exchange. Pursuant to sale of shares the said broker had also issued contract notes cum bill for sale and these contract notes and bills were made available during the course of appellate proceedings. On the sale of shares respondent effected delivery of shares by way of Demat instructions slip and also received payment from Kolkata Stock Exchange. The cheque received was deposited in respondent's bank account. In view thereof, the CIT[A] found there was no reason to add the capital gains as unexplained cash credit under Section 68 of the Act. The tribunal while dismissing the appeals filed by the Revenue also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange. The ITAT therefore, in our view, rightly concluded that there was no merit in the appeal.”

We have heard the rival submissions and examined the documents available on record. The assessee has filed an appeal against the addition made in respect of the profit on sale of shares amount to Rs.2602806/- being the aggregate of sale proceeds of shares of Pearl Agriculture Ltd (PAL) of Rs.1258539/- and of Pearl Electronics Ltd. (PEL) of Rs.1344267/-. The said scrips were allotted to the assessee in January, 2013 pursuant to Hon’ble Bombay High Court order in the demerger scheme in respect of his holding of 4000 shares of Nouveau Global Ventures Ltd (NGVL) (earlier known as Nouveau Multimedia Ltd) which shares were purchased on BSE platform through SEBI regd. share broker on 25.3.2011. The scrips of PAL & Heaven Mahendra Shah PEL received on demerger were sold during the impugned financial year on BSE platform. We observe that the entire addition was confirmed solely on the basis of the report of the Investigation Wing of the Income-tax Department, Kolkata, which alleged that the rise in share price was manipulated, and that the assessee had introduced unaccounted income in the guise of LTCG through a circular transaction. During the assessment as well as appellate proceedings, the assessee submitted all requisite documentary evidence, including the demat account statement, bank statement, sale bill, and share allotment documents. All such documents have been placed on record in the assessee’s paper book. This demerger was carried out through a proper legal process. Importantly, the documents submitted by the assessee during the assessment proceedings were neither challenged nor discredited by the revenue authorities. Therefore, the assessee has discharged the primary onus of proving the genuineness of the transactions. The LTCG proceed was received by the assessee through regular banking channels. The purchased shares were credited to the assessee’s demat account, and the entire transaction was routed through the BSE. No evidence has been brought on record by the revenue to demonstrate that the assessee was involved in any price manipulation or rigging with respect to the shares of PAL & PEL. We also note that the co-ordinate bench of the ITAT has taken a similar view in relation to the this transaction. Accordingly, we respectfully rely on the decisions of the Hon’ble Jurisdictional High Court in Indravadan Jain (supra) and order of the co-ordinate bench in the cases of Poornima Ramesh Shenoy (supra). We seaside the impugned appellate order. The additions made by the Ld. AO under Section 68 of the Act, amounting to Rs.26,02,806/- on account of LTCG, is hereby deleted.