ANNU ANIL AGRAWAL,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 4(4), MUMBAI, MUMBAI

Appellant contends that, assessing officer and Appellate Authority erred in ignoring the fact that during course of assessment proceedings as well as in assessment order Ld.AO has reproduced detailed Investigation Report of SEBI in scrip of JMD Telefilms limited in which it is clear that assessee was not involved in any violation and no adverse finding has been reported against her by the SEBI in their investigation report. However assessing officer and Appellate Authority erred has grossly ignored the finding of SEBI report, which clearly indicates that the assessment proceedings was opened grossly with intention of making addition to total income of the appellant.

Appellant contends that, assessing officer and Appellate Authority erred in treating sales consideration received from sales of shares of M/s. JMD Telefilms Limited as unexplained cash credit and added it to the total income of the assessee under the head Income from other sources, without taking into the considering documents and legal submissions made by the A.R. of the assessee during the course of the assessment proceedings for justification of assessee appellant claim with respect to Long Term Capital Gain from the sales of Shares of M/s. JMD Telefilms Limited.

Appellant contends that, Assessing Officer and Appellate Authority has outrightly rejected appellant claim for Long Term Capital Gain from sales of shares of M/s. JMD Telefilms Limited of Rs. 6,59,81,605/- without bringing on to the records or in the assessment order any material evidence against the assessee that the assessee was one of the beneficiaries of bogus entries of capital gain in the scrip of M/s, JMD Telefilms Limited.

All these points/discrepancies were pointed out by the assessee in the reasons recorded by filing her objections vide letter dated 23.08.2017. It is important to mention here that although the AO had disposed of the objection filed by the assessee vide its order dated 30.08.2017, but stating the same figure of Rs. 9,75,08,667.65 as mentioned in reasons for reopening which goes to show that the AO had not applied his mind while disposing of the objections filed by the assessee. We are of the considered view that Section 147 of the Act empowers the AO to reopen the assessment if the additions prescribed therein are satisfied. The basic condition is that the AO has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year. But, A.Y. 2011-12 Annu Anil Agrawal in the present case, the AO, without applying his judicial mind, merely acted on the forwarded information of the DIT Investigation, Kolkata. Even after pointing out the mistake and the correct amount of LTCG by the assessee, the AO still mechanically disposed of the objections by stating the same figure as mentioned in the reasons for reopening, which shows that the AO had not considered the submissions or documents filed by the assessee while filing objections.

Even in the reasons for reopening, the AO has no reason to believe, and it is just mere roving enquires. The reasons recorded by the AO for reopening the assessment, as communicated on 17.07.2017, are factually incorrect. The AO alleged transactions in "penny stocks" worth Rs. 9,75,08,667.65 through 77 transactions, linked to Consortium Capital Private Limited and a statement by Shri Jaikishan Poddar. However, the assessee asserts they never traded in Consortium Capital Pvt. Ltd. and have no connection with Mr. Jaikrishan Poddar, and even the amount mentioned is incorrect 10. It goes to show that the AO relied solely on information from the Director of Income Tax (Investigation), Kolkata, without establishing a link to the assessee's transactions. The statement of Jaikishan Poddar and the alleged "penny stock scam" report are unrelated to the assessee's activities.

Reliance is being placed upon the decision of the Delhi High Court in Signature Hotels Pvt. Ltd. v. ITO Writ Petition (Civil) No. A.Y. 2011-12 Annu Anil Agrawal 8067/2010, wherein it was held that reopening based on borrowed information without independent application of mind by the AO is invalid. The AO must demonstrate a rational connection between the material and the escapement of income. Here, the absence of a specific script name and reliance on an unrelated third-party statement weakens the AO's case.

Therefore, in our view, the AO’s reasons lack specificity, failing to mention the script name and citing an arbitrary figure (Rs. 9,75,08,667.65) without justification. Reliance in this regard is placed on the decision of the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. v. R.B. Wadkar (2004) 190 CTR (BOM) 275, wherein the Hon’ble High Court ruled that reasons for reopening must be precise and based on concrete material. Vague or arbitrary allegations, as in this case, do not meet the threshold for "reason to believe”.

Therefore, we are of the considered view that merely placing reliance on any other authority without recording own satisfaction or bringing any cogent substance on record shows that, without applying his mind, the AO has issued the notice, which is invalid. Since the AO has formed his reason to believe just on the basis of the information received from the Director of Income Tax (Inv.), Kolkata, that income has escaped assessment and not a reason to believe which is necessary for reopening of the assessment proceedings. In our view, the AO cannot reopen the assessment merely on the basis of information received A.Y. 2011-12 Annu Anil Agrawal without applying his independent mind to the information and forming an opinion.

Reliance is also placed in the case of PCIT 5. Mumbai vs. Shodiam Investment Private Limited ITA 1297 of 2015, wherein it has been held s under: "14 Further, the reasons clearly shows that the Assessing Officer has not applied his mind to the information received by him from the DDIT (Inv.). The Assessing Officer has merely issued a re-opening notice on the basis of intimation regarding re- opening notice from the DDIT (Inv.) This is clearly in breach of the settled position in law that reopening notice has to be issued by the Assessing Office on his own satisfaction and not on borrowed satisfaction.

It is well established that the reason recorded by the Ld. A.O. shall be concrete, specific and shall be recorded after making all necessary and independent enquiries and the AO should clearly ‘form his belief’ that the assessee has escaped income and only then can he reopen the assessment u/s 147 of the Act. The reopening for the purpose of fishing inquiries or to verify the details is not permitted u/s 147 of the Act. There is distinction between reason to believe and reason to suspect. Reliance is placed on the following judgements: a. Bhor Industries Ltd. v/s. ACIT - [(2004) 267 ITR 161 (Bombay High Court)] b. Ajanta Pharma Ltd. v/s. ACIT - [(2004) 267 ITR 200 (Bombay High Court)] с. CIT v. Maniben Velji Shah (2006) 283 ITR 453 [(Bombay High Court) d. Balakrishna H. Wani vs. ITO 321 ITR 519 (Bombay High Court)

We also noticed that SEBI Investigation report divided the period into 8 parts, i.e. 8 Patches. The assessee trades fall in patch 6-Price Fall 09.03.2010 to 30.04.2010: - on deep analysis done by the SEBI, it reveals that the stock price during this period falls from Rs. 143.05/- to Rs. 47.6/-If the assessee is involved in manipulative trades, then she would have sold the shares at peak and not at the bottom. The assessee sold the shares of JMD Telefilm Private Limited at an average price of Rs. 54-55.

Even though there is no evidence in the Assessment Order or SEBI report indicating that the assessee was subject to any direct enquiry or investigation by SEBI regarding her transaction in Patch 6. The assessee complied with all statutory notices issued during the reassessment proceedings, attending the office on November 9, 2017. and providing a statement under oath as per Section 131(1) of the Income-tax Act, 1961. Even no communication from SEBI implicates the assessee in any wrongdoing.

It is important to mention that the report does not suggest that every transaction in the scrip. particularly in Patch 6, was manipulative. Therefore, punishing the assessee, who is not named or implicated by the SEBI or any other A.Y. 2011-12 Annu Anil Agrawal agencies, for the actions of unrelated parties is contrary to the principles of natural justice and fairness.

We are of the considered view that just the modus operandi, generalization, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee. Unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same cannot be rejected. Reliance is placed on Hon'ble Mumbai ITAT bench in the case of Vijayrattan Balkrishan Mittal vs. DCIT CC- 8(1) [ITA No. 3427-29/Mum/2019], wherein it has been held as under: "An alleged scam might have taken place on LTCG etc. But it has to be established in each case, by the party alleging so, that this assessee in question was part of this scam. The chain of events and the live link of the assessee's action giving his involvement in the scam should be established. It is well settled that evidence collected from third parties cannot be used against an assessee unless this evidence is put before him and he is given an opportunity to controvert the evidence. In this case, the Ld. AO relies only on a report as the basis for the addition. The evidence based on which the DDIT report is prepared is not brought on record by the Ld. AO nor is it put before the assessee. The submissions of the assessee that he is just an investor and as he received some tips and he chose to invest based on these market tips and had taken a calculated risk and had gained in the process and that he is not party to the seam etc., has to be controverted by the revenue with evidence when a person claims that he has done these transactions in a bona fide manner, one cannot reject this submission based on surmises and conjectures. As the report of investigation wing suggests, there are many beneficiaries of LTCG. Each case has to be assessed based on principles of legal import laid down by the Courts of law.

Therefore, the SEBI order, while identifying price manipulation by specific entities in the JMD Telefilms scrip, does not name or implicate the assessee in its findings. particularly for her transaction in Patch 6. Therefore, sale at a lower price Rs. 54-55 during a period of price decline, after holding the shares for over three years, contradicts the modus operandi of manipulative A.Y. 2011-12 Annu Anil Agrawal trades. The absence of any SEBI enquiry involving the assessee and the legitimate nature of her stock exchange transaction further affirm the genuineness of her LTCG claim under Section 10(38).

We noticed that the CIT(A) overlooked the crucial fact that the Assessee did not purchase shares in the scrip of Consortium Capital Ltd, a private company, nor was beneficiary in any manner. However, the AO relied on the specific report of Securities and Exchange Board of India on JMD Telefilm Ltd.

We are conscious of the fact that the Securities and Exchange Board of India has been accorded wide powers under the SEBI Act, 1992 ('SEBI Act') to ensure the fair functioning of the securities markets in the country. As the watchdog of the nation's bourses. SEBI takes enforcement action against those who violate the integrity of the market by indulging in synchronized trades with the intent of price/volume manipulation.

Now, in the present case, we found that the SEBI has not issued any notice to the assessee or broker of the assessee in relation to these trades. The assessee submits again that it has never received any notice for violating the SEBI Rules or regulations.

Therefore, the AO has made a baseless allegation and put reliance of the Investigation report, without any substance and corroborative evidences. The SEBI Report reproduced by the AO in the assessment order has nothing to do with the assessee. If some person manipulates the trades in JMD Shares does A.Y. 2011-12 Annu Anil Agrawal not mean that the assessee was also involved. There is no evidence from AO or in the report reproduced by the AO in assessment order.

Therefore, the addition made by placing reliance on the SEBI stands deleted, and the above-ground stands allowed.

Ground Nos. 4 to 7: All the grounds are interrelated and interconnected and relate to challenging the order of Ld. CIT(A) in upholding the additions made by the AO. Therefore, we have decided to adjudicate these grounds through the present consolidated order.

From the records, we notice that during the course of the assessment proceedings, the assessee submitted all the details and documents relating to the transactions conducted in the scrip of M/s. JMD Telefilms Limited to discharge the onus and to prove the genuineness of the said transactions. The assessee statement was recorded under section 131 of the Act where the assessee has explained the purchase and sale of JMD Telefilm Limited. The assessee during the course of the assessment duly submitted all the required documents. However, the AO concluded in the assessment order that the assessee's submission was untenable.

Further, in para 8.3 of the assessment order, the AO, analysed the fundamentals of the alleged scrip. JMD Telefilms Limited, for 6 years, wherein according to the AO, the net worth of the company was negligible. It is pertinent to mention that the assessee is a long term investor in a number of scrips and A.Y. 2011-12 Annu Anil Agrawal the fundamentals of a particular scrip is not of primary importance. Without prejudice to the above, even if the year wise financial comparison of the alleged scrip provided by the AO is considered, it can be clearly seen that there is substantial increase in the PAT (Profit after Tax) from 1.55 crore in FY 2009-10 to 2.86 crore in FY 2010-11 (relevant to the impugned AY 2011-12), which is almost double as compared to the previous year. Therefore, the theory of the AO. that the fundamentals of the company were not good, is incorrect and misplaced.

Further, in the para 9 and 10 of the Assessment Order, the AO mentioned that the assessee had sold the alleged scrip through the exchange in FY 2013-14 and further compared the returns of BSE/SENSEX of FY 2013-14, finding the assessee's returns in the scrip to be astronomical. Furthermore, the AO. categorically mentioned on multiple occasion in the ensuing paragraphs that the alleged scrip of the assessee was M/s Sunrise Asian Limited. However, the AO. failed to realise that the impugned year was AY 2011-12 (relevant to FY 2010-11) and that the assessee had sold the alleged scrip in AY 2011-12 and not FY 2013-14, and the assessee has never till date traded in the scrip M/s Sunrise Asian Limited, as mentioned by the AO, depicting complete ignorance in appreciating the facts of the assessee's case.

Furthermore, in the assessment order, the AO reproduced the SEBI Investigation Report (Para 12 of the Assessment Order page 10) in case of M/s A.Y. 2011-12 Annu Anil Agrawal JMD Telefilm Limited received from SEBI u/s 133(6) of the Act. The SEBI Investigation report neither mentioned the assessee name or the assessee's broker name. The Investigation report by SEBI was first reproduced in assessment order without giving the opportunity to the assessee to rebut the so called report of SEBI in case of JMD Telefilm Limited.

The AO, at the end, while completing the assessment proceedings, made the addition of Rs. 6,67,42.582/- u/s 68 of the Act to the total income of the assessee by treating the sales consideration received from the sales of shares of M/s JMD Telefilms Limited as ‘unexplained cash credit’ and added it to the total income of the assessee under the head "Income from Other Sources" even though the above sale consideration has been duly reflected in the return of income after reducing the cost of investment as "Long Term Capital Gains" and the same has been claimed as exempt income u/s 10(38) of the Act.

The assessee had sold the impugned shares through the recognised stock exchange through reputed registered brokers, wherein the purchasers and sellers are not aware of the other's identities. Accordingly, there was no way for the assessee to know the persons/entities to whom the impugned shares of JMD Telefilm Limited were sold.

The assessee has submitted the following documents to prove the genuineness of the transaction and claim of 10(38) in JMD Telefilm Limited:

It is in that regard that we find that Mr.Gopal's contentions are well founded. The Tribunal concluded that there was something more which was required, which would connect the present Assessee to the transactions and which are attributed to the Promoters/Directors of the two companies. The Tribunal referred to the entire material and found that the investigation stopped at a particular point and was not carried forward by the Revenue. There are 1.30,000 shares of Bolton Properties Ltd. purchased by the Assessee during the month of January 2003 and he continued to hold them till 31 March 2003. The present case related to 20.000 shares of Mantra Online Ltd for the total consideration of Rs.25.93.150/-, These shares were sold and how they were sold on what dates and for what consideration and the sums received by cheques have been referred extensively by the Tribunal in para 10. A copy of the DMAT account, placed at pages 36 & 37 of the Appeal Paper Book before the Tribunal showed the credit of share transaction. The contract notes in Form-A with two brokers were available the transactions. The generated and prescribed by the Stock Exchange. From this material. In para 11 the Tribunal concluded that this was not mere accommodation of cash and enabling it to be converted into accounted or regular payment. The discrepancy pointed out by the Calcutta Stock Exchange regarding client Code has been referred to. But the Tribunal concluded that itself, is not enough to prove that the transactions in the impugned shares were bogus/sham. The details received from Stock Exchange have been relied upon and for the purposes of faulting the Revenue in failing to discharge the basic onus. If the Tribunal proceeds on this line and concluded that inquiry was not carried forward and with a view to discharge the initial or basic onus, then such conclusion of the Tribunal cannot be termed as perverse. The conclusions as recorded in para 12 of the Tribunal's order are not vitiated by any error of law apparent on the face of the record either.

As a result of the above discussion, we do not find any substance in the contention of Mr.Suresh kumar that the Tribunal misdirected itself and in law. We hold that the Appeals do not raise any substantial question of law. They are accordingly dismissed. There would no order as to costs.

In this case with regard to the so-called Penny Stock Capital Gain, the Hon'ble Mumbai ITAT "F" Bench has recently delivered judgment in Appeal No. 3801/Mum/2011 in the case of Ms. Farrah Marker vs. ITO 19(3)(1), Mumbai, wherein it was held that the Long-term capital gains on sale of "penny" stocks cannot be treated as bogus & unexplained cash credit if the documentation is in order & there is no allegation of manipulation by SEBI or the BSE. Denial of right of cross-examination is a fatal flaw which renders the assessment order a nullity. The fact of the case in this case is reproduced here: The assessee, an individual, filed her return of income for A.Y.2005-06 on 04/08/2005 declaring income of Rs. 1,19,653/- after claiming the income from long A.Y. 2011-12 Annu Anil Agrawal term capital gain (LTCG) of Rs.93,00,012/- on sale of listed equity shares and subjected to STT as exempt under section 10(38) of the Income Tax Act, 1961 (in short 'the Act'). The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. In the course of assessment proceedings, the Ld. AO observed that the shares of Shukun Constructions Ltd. (hereinafter referred to as 'the said shares') are nothing but penny stock and that the assessee has back dated the purchase of the said shares in transactions to generate artificial gain. He required the assessee to substantiate her claim of exemption on the capital gain arising on the sale of the said shares. After considering the details documents and submissions filed by the assessee in support of the claim of exemption from LTCG on sale of the said shares and discussion of available data on penny stocks, modus operandi generally adopted by interested persons to avail the arranged exemption of LTCG/STCG/speculation Profit/Loss, stock price movement of the said company and on the basis of the statement recorded from one Shri Niraj Sanghvi, the Ld. AO concluded that the LTCG shown by the assessee on Sale of the said shares of Shukun Construction Ltd. is not a genuine transaction but a fabricated one. In that view of the matter, the Ld. AO. while concluding the assessment, treated the entire sale proceeds of the said shares amounting to Rs.95.12.812/-as unexplained cash credit under section 68 of the Act and brought the same to tax in the assessee's hand. The assessment was accordingly completed under section 143(3) of the Act, vide order dated 31/12/2007 wherein the assessee's income was determined at Rs.96.32,470/- primarily due to the addition of the sale proceeds on sale of the said shares amounting to Rs.95,12,812/- under section 68 of the Act. Aggrieved by the order of assessment for A.Y. 2005-06 dated 31/12/2007, the assessee preferred an appeal before the CIT (A)-30, Mumbai. The learned CIT (A) dismissed the assessee's appeal vide the impugned order dated 24/02/2011 upholding the addition made by the Ld. AO under section 68 of the Act. The Hon’ble Bench held in Para 3.4.1 as under: "3.4.1. We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncements cited. From a perusal of the Paper Book (pages i to viii and pages 1 to 72) containing copies of written submissions, copies of documents placed before the authorities below, we find that documents pertaining to the purchase and sale of shares of M/s Shukun Constructions Ltd. Such as contract notes of brokers, copies of physical shares certificate, transfer of physical shares to the name of the assessee and consolidation by the company, the D-MAT account statement of the assessee with SHCIL confirming the said shares in the assessee's name, bank statements and summary thereof and financial statements of the assessee, viz., Balance Sheet of earlier years showing that the fact of holding these shares were furnished before the Ld. AO from 16/07/2007 onwards. Le. well before the assessment was concluded on 31/12/2007. It is also seen that the show cause notice issued by the Ld. AO to the assessee on 13/11/2007 as to why the transaction in the said shares be not treated as a bogus/arranged one was replied to by the assessee vide letter dated 21/11/2007 addressed to the Ld. AO. In our considered view after an appreciation of the material on record, we find that no proper investigation has been carried out by the Ld. AO to controvert the material evidence brought on record by the assessee. Even the statement recorded on 31/12/2007 by the Ld. AO from one Sir Niraj Sanghvi, which A.Y. 2011-12 Annu Anil Agrawal was strongly relied upon by the Ld. AO, we find has no evidentiary or corroborative value as it is of a person who has no role in the said share purchase transactions. Further, the said statement, recorded on the day the order of assessment was concluded, i.e. 31/12/2007, was recorded behind the back of the assessee and neither copy of the same was given to the assessee for rebuttal, nor was the assessee allowed due opportunity to cross-examine Shri Niraj Sanghvi. It is seen from the record that no statement was recorded from Smt. Charu Sanghvi, Proprietor, falgun Invest from whom the assessee purchased the said shares M/S. Shukun Constructions Lid. In this factual and legal matrix as discussed above, we find that the statement of Shri Niraj Sanghvi, which was so strongly relied upon to form the basis of the Ld. AO's conclusion, is fatally flawed and has no corroboratory or evidentiary value since it was recorded behind the back of the assessee and was used to arrive at an adverse finding in respect of the assessee's purchase of the 'said shares without putting the assessee on notice by affording her opportunity of rebuttal of the statement and/or cross-examination of Shri Niraj Sanghvi."

Therefore, considering the totality of facts and legal preposition as discussed above, we direct the AO to delete the additions and subsequently allow these grounds.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 01.07.2025.