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Facts
The assessee, a retired government employee, declared capital gains from share sales. The AO reopened the case based on information from a search on a third party, alleging the shares were part of a penny stock manipulation scheme for accommodation entries. Additions were made under Section 68 for unexplained cash credit and Section 69C for commission.
Held
The Tribunal held that the assessee had provided sufficient evidence to prove the genuineness of the share transactions. The AO's assumptions about penny stock manipulation were not substantiated, especially given the delay in the search action and the company's financial performance. The additions were deleted.
Key Issues
Whether the additions made by the AO under Section 68 and 69C are sustainable when the assessee has provided evidence of genuine share transactions and the allegations are based on third-party information without independent verification and considering the company's financials.
Sections Cited
148, 68, 69C, 143(1), 132(4), 46A, 10(38)
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PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the order of ld. CIT(A) / NFAC dated 31.01.2025 for A.Y. 2012-13. The assessee has raised the following grounds of appeal: .
1. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in re-opening the case u/s 148 which is bad in Law."
1. 2. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming re-opening of the case which was based on roving and vague inquiry."
3. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming stand of A.O. for invoking provisions of section u/s 68 of the act which are not applicable to the fact of the case.
4. On the facts and circumstances of the case in law, the Ld. CIT(A) erred in not appreciating remand report whereas Ld. A.O. himself agreed for removal for purchases cost from gross value of sale proceeds received from sale of shares.It is a pure and simple case of non-application of mind by the First Appellate Authority.
Rajendra (AY 2012-13)
On the facts and circumstances of the case in law, the Ld. CIT(A) erred in not considering submission as well as evidences produced before him.
6. On the facts and circumstances of the case in law, the Ld. CIT(A) erred in confirming addition of Rs. 11,97,290/- which is bad in Law." 7. "On the facts and circumstances of the case in law, The Ld. CIT(A) erred in confirming addition of Rs. 23,945/- which is bad in Law. 8. The Assessee has right reserve to Amend modify delete and make any additional grounds of appeal
."
2. Brief facts of the case as extracted from the orders of lower authorities are that assessee is a Senior Citizen and a retired Central Government employee, filed his return of income for A.Y. 2012-13 on 17.09.2012 declaring income of Rs. 14,23,340/-. In the computation of total income, the assessee apart from income from ‘salary, ‘other sources’ also have shown ‘capital gain’ on sale of shares. Initially the return of income was processed under section 143(1). Later on, case of assessee was reopened on the basis of information from DIT (Investigation), Mumbai that a search was carried out in case of Shri Naresh Jain and his associate throughout Country on 19.03.2019. In the search action it was revealed that said group was indulging in providing accommodation entry in the form of bogus long term capital gain /short term capital loss or business loss to various beneficiaries. The said group was involved in trade of scripts of shares of seven companies. The name of seven companies and their code is mentioned in para 4 of the assessment order. One of such company was Divine Multimedia (India) Ltd. As per information, the assessee was found to be beneficiary of sale of shares of Rs. 11,97,290/- of Divine Multimedia (India) Ltd during the relevant assessment year as Rajendra (AY 2012-13) recorded in para-5 of assessment order. The AO also noted that Naresh Jain in his statement, recorded under section 132(4) admitted that he provided accommodation entry of penny stock, as recorded in para- 6 & 7 of assessment order. On the basis of such information, case of assessee was reopened. The assessing officer after recording modus operandi of Naresh Jain and his associates and referring their statement, issued a show cause notice dated 16.12.2019 to the assessee as to why the sale consideration on sale of share of Divine Multimedia (India) Ltd. should not be treated as unexplained cash credit and added under section 68. The assessing officer recorded that despite providing opportunity no reply was given nor any relevant document was furnished by the assessee. The assessment was getting time barred on 31.12.2019, therefore, the assessing officer completed the assessment and made the addition of entire sale consideration on sale of shares of Divine Multimedia (India) Ltd of Rs. 11,97,290/- as unexplained and added under section 68. The assessing officer also added 2.00 % of said sale consideration as commission paid to entry provider thereby further made addition of Rs. 23,945/- under section 69C.
3. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee filed detail statement of fact and written submission. In the written submission, the assessee stated that assessing officer finding are based on his statement recorded during search action, wherein statement of Naresh Jain was recorded about modus operandi of price rigging of various scrips. According to his statement the scheme involved acquiring of listed companies, artificially manipulating their Rajendra (AY 2012-13) share price and providing accommodation entries to beneficiaries through preferential allotment of share or market operations. The assessing officer also relied on the statement of other directors in the entities of Shri Naresh Jain. On the basis of such statement and finding of investigation wing, the assessing officer made two additions in the return of income of assessee and added the amount of Rs. 11,97,290/- under section 68 on account of sale of shares of Divine Multimedia (India) Ltd. And also added commission income @ 2.00 % of sale consideration of shares. The assessee also stated that he is a Senior Citizen and a retired Government Officer. The addition in his assessment is based on third party statement, no independent enquiry was conducted by assessing officer no specific evidence for linking the addition for price manipulation is brought on record. The statement recorded by Investigation Wing was not provided to the assessee. No opportunity of cross examination was provided to the assessee. Financial performance of the company during relevant period was ignored. The assessee also raised legal ground about manually mention of DIN on the assessment order, which was mentioned by way of separate letter, which in violation of CBDT direction. The assessee also filed application for admission of additional evidence under Rule 46A of Income Tax Rules. Such documents/ evidencesconsist of ledger account with Satco Capital Limited for F.Y. 2010-11 and 2011-12, original purchase contract showing buying of shares, contract notes about sale of shares, detail of financial account of Kale films (now Divine Multimedia (India) Ltd. Income tax return of earlier assessment year.
Rajendra (AY 2012-13) 4. On the submission of assessee, the ld. CIT(A) called remand report from assessing officer. The assessing officer furnished remand report along with his letter dated 30.10.2024. The main contents of remand report filed by the assessing officer is mentioned in para-3.6.2 of order of ld CIT(A). In the remand report the AO stated that documental evidences furnished by assessee, does not disapprove the finding of investigation wing regarding orchestrated nature of transaction. The ledger account on contract note merely proved the exhibition of transaction but not their genuineness. The evidence does not alter the conclusion of investigation which clearly proves the modus operandi. The statement recording during search confirms pre- arranged nature of transaction. The pattern of price manipulation matches timeline or assessee’s transaction. Against the remand report, the assessee also filed his rejoinder. In the rejoinder, the assessee stated that AO has accepted documentary evidences and the transaction of sale and purchase. Though the AO placed reliance on evidence collected during such proceeding on third party. The AO referred the finding of those AO without independently verifying the claim of assessee. Statement of third party is not provided in which specific allegation purportedly made against assessee. The AO has not brought any material on record to substantiate the role of assessee in price rigging activities. The assessee has no connection with the management of company in question. Assessment is based solely on an investigation report which content general observation which do not specify direct role of assessee. Neither (SEBI) Security Exchange Board in India nor any agency has initiated an action against assessee. It is established principle in taxation Rajendra (AY 2012-13) that once department accepted the genuineness of purchase, the corresponding sale cannot be doubted. AO has accepted purchases as genuine.
5. The ld CIT(A) on considering the assessment order, submissions of assessee and remand report of assessing officer, upheld both the addition by taking a view that the assessment proceeding were initiated lawfully and notice under section 148 was duly issued and served. The assessee failed to provide any cogent evidence to cogence the legality of notice. Sufficient opportunity was given to assessee from time to time and there is no denial of opportunity of hearing. The finding of investigation wing reveals that Divine Multi-media (India Ltd.) was used for accommodation entry. The claim of assessee that transaction was genuine and through stock exchanges was found unsubstantiated as 68 applies when identity, credit worthiness and genuineness was not established. The submission of independent enquiry is not conducted is misplaced as reliance on creditable external report is legally valid. On such observation ld. CIT(A) confirm the action of AO in making addition of Rs. 1197290/- under section 68. Once addition under section 68 was upheld, the ld. CIT(A) also upheld the addition of action of AO of commission. Further aggrieved, the assessee has filed present appeal before Tribunal.
We have heard the submissions of learned authorised representative (ld AR) of the assessee and the learned senior departmental representative (ld Sr DR) for the revenue and have gone through the orders of lower authorities carefully. The Ld. AR for the assessee submits that assessee is an individual Rajendra (AY 2012-13) and retired Government Officer. The assessee served on various key posts in the Central Government. The assessee served as Commissioner (Exemptions) in Mumbai, Special Director in Enforcement department and Accountant Member in Income Tax Appellate Tribunal. The assessee is regular investor in various shares scraps. The assessee purchased shares of impugned scrips in bonafide way as regular investor; copy of portfolio of assessee with his broker is filed on record. The assessee was making investment in shares from more than decades, copy of ITR and computation of income of AY 1996-97, 2000- 01, 2001-02 and 2006-07 are filed on record. There was no adverse reporting against the said company, when the assessee purchased such shares. Consideration of purchase of shares was paid through banking channel. The assessee purchases such 7769 shares of Divine Multimedia (India) Ltd @ Rs.7.54 per share on 26.12.2011 and 32231 shares @ Rs7.86/- per shares on 13.04.2010. The assessee made total investment of Rs. 3,11,889/-. The price of such shares reached up to more than Rs. 50.00 per shares. However, during the relevant financial year, the assessee sold 13094 share of Divine Multimedia (India) Ltd@ Rs. 31.29/- per share on 26.11.2011, 6909 shares @ Rs. 29.60 per shares on 27.12.2011, and 20,000/- shares @ Rs.28.85/- per shares on 28.12.2011, thus, sold at total sale consideration of Rs. 11,91,158/- . Entire purchase and sale were made through banking channel. All shares were purchased in Dmat account and sold through stock exchange. Shares were sold through recognised stock exchange through Satco Securities Limited (broker). No preferential shares were allotted. The assessee has paid all statutory charges, duty or tax applicable on the transaction. Being Central Rajendra (AY 2012-13) Government employee, the assessee informed respective higher authorities about his investment. The assessee is a genuine purchaser. During assessment the assessee sought time to file complete evidence and file application for seeking time, copy of one of such application is filed on record vide page No. 9 of paper book. The AO instead of considering the plea of assessee held that the assessee has not filed any reply. Before ld CIT(A, the assessee filed complete details with his submissions. The ld CIT(A) has not considered the submission of assessee and confirmed addition with pre- determined notions without appreciation of facts in a proper way. The Ld. AR for the assessee submits that assessee furnished completed details about LTCG earned on sale of share held more than 12 months and payment made through banking channel. The assessee has paid security transactions tax (STT) and surplus earned on such sale was claimed as exempt income under section 10(38) of the Act. The sale of shares was made through BSE and all necessary evidence to substantiate the genuineness of such transactions was furnished before lower authorities. The Assessing Officer mainly acted on the report of Investigation Wing, Mumbai, copy of such Investigation Wing was never supplied to assessee. The Ld. AR for the assessee submits that Assessing Officer in his show cause notice also assumed that assessee had paid commission and such assumption is not supported with any corroborative evidence. The sale transactions were received through banking channel though assessee paid security transaction tax. The Ld. AR for the assessee further submits that assessee has furnished contract note issued by his broker, copy of bank account showing the purchase of shares, sales of Rajendra (AY 2012-13) share through Dmat account and carried transaction through broker, who is well known share broker. The Ld. AR for the assessee submits that SEBI has not issued any notice to the assessee, there is no allegation against share brokers of assessee that he was involved in price manipulation The Ld. AR for the assessee submits that ld CIT(A) confirmed the addition without giving any adverse finding on the evidences furnished by the assessee or bringing any adverse materials against evidence furnished by assessee. The assessee filed various documents running into 105 pages in the form of paper book. The assessee has fully discharged her onus in proving the genuineness of such transaction. To support his submission, the ld. AR for the assessee file copies of twenty-four case laws, but at the time of hearing mainly relied on following decisions: ➢ CIT Vs Genuine Finance (P) Ltd (2024) 162 taxmann.com 700 (SC), ➢ PCIT Vs Indravardhan Jain HUF in of 2018 (Bom HC), ➢ PCIT Vs Ziauddin A Siddique in ITA No. 2012 of 2017 (Bom HC), ➢ PCIT Vs Krishan Devi (2021) 126 taxmann.com 80 (Delhi), ➢ Lalita Ben Praveen Shah Vs CIT in ITA No. 2008/Mum/2023, ➢ ACIT Vs Rajkumar ( ITA No. 339/Srt/2022), ➢ ITO Vs Hitesh Mangilal Jainin ITA no. 261/Mum/2024 and ➢ Ramesh J Thakkar Vs ITO in ITA No. 283/Mum/2022.
On the other hand, the ld Senior departmental representative ( Sr DR) for the revenue supported the orders of lower authorities. The ld Sr DR of the revenue submits that the AO was having information from DIT (Inv), Mumbai that a search was carried out in case of Naresh Jain and his associate throughout Country on 19.03.2019. In the search action it was proved that Naresh Jain and his group was providing accommodation entry in the form of Rajendra (AY 2012-13) bogus long term capital gain /short term capital loss or business loss to various beneficiaries. The said group was involved in trade of scripts of shares of seven companies; one of such company was Divine Multimedia (India) Ltd. As per information, the assessee was also beneficiary of sale of shares of Rs. 11,97,290/- of Divine Multimedia (India) Ltd. Thus, the capital gain shown by the assessee during the relevant financial year was nothing but result of penny stock entry. The evidence collected during search action proved beyond doubt that Divine Multimedia (India) Ltd was penny stock company, shares of which was utilised by Naresh Jain and his group by price rigging for the purpose of providing entry of bogus capital gain. Once it is proved on the basis of report of investigation wing that the assessee is beneficiary of penny scrips, whose price were manipulated by malpractices and resultant benefits are on account of manipulative practice are also to be treats as tainted. To support his submissions, the ld Sr DR for the revenue relied on the decisions of Kolkata High Court in Swati Bajaj (2022) 446 ITR 56 (Kol)/ 288 Taxman 403 (Kol).
We have considered the rival submission of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by both ld. AR of the assessee and ld Sr DR for the revenue in their submissions. We find that the Assessing Officer doubted the transaction of assessee on the basis of report of Investigation Wing Mumbai. The AO made addition of sale consideration of scrips of Devine Multimedia (India) Ltd as unexplained taxable income under section 68. The AO also added 2.00% of sale transaction by taking view that the paid commissions to Rajendra (AY 2012-13) the entry provider. The AO made addition on unexplained commission of Rs. 23,945/- under section 69C of Income Tax Act. We find that before ld CIT(A), the assessee has furnished complete evidence including contract note of shares, Dmat account details, detail of bank account.
After hearing rival submissions and perusing the paper book filed by Ld. AR of the appellant, Bench decided to delete the addition made by the Ld. AO and reverse the decision of Ld. CIT(A) for the following reasons : a) The appellant being an employee of Central Government has informed his higher authorities about his investment in the shares as per Rules governing his services, at the time of entering into the transactions itself. Had there been any information in the knowledge of appellant about the penny stock or its manipulation of price movements, the appellant would not have informed his higher authorities. In other words, during the relevant period under consideration the appellant was posted as Special Director of Enforcement Directorate and informed his superior officer about the investment in shares. b) The search action by the Investigation Wing of Kolkata Investigation Directorate took place after more than six years of completion of the transaction and disclosure of capital gains by the appellant i.e. the search took place in 2019, whereas the transaction was done by appellant in 2012 itself. So, there is no question of appellant is in knowledge of price manipulation done in this scrip. c) Even though, several decisions were cited by both sides, what is to be determined is that each penny stock is to be examined from the Rajendra (AY 2012-13) fundamentals/financials of that particular scrip and it cannot be said that the cash already covered/adjudicated. d) The Ld. AO made the addition of entire sale consideration without deducting the cost of purchase of shares of at all anything to be added, it is the only profit element, but entire sale consideration cannot be added. He has also presumed that certain commission was paid for arranging the transaction without naming the person and mode of payment. All these aspects show non-application of mind of the part of appellant. e) To make an allegation that a particular share is penny stock or price manipulations are done, one has to look into financials of the company during the year under consideration. If analysis is done from this angle, in the last two years (A.Y. 2011-12 and 2012-13), the company M/s. Divine Multimedia Ltd. had a turnover of more than Rs. 40.00 crore a net profit of approximately Rs. 55.00 lakhs with a share capital of Rs. 6.69 crore and Reserves of approximately Rs. 18.00 crores. Hence, in the impugned year, the company cannot be treated as a non-descript company nor the share can be labelled as penny stock. Hence, the assumption of AO that the same is a penny stock is factually incorrect.
To sum up, the share is neither a penny stock in the impugned assessment year, nor the additions made by the AO can be sustained due to the above mentioned reasons. The additions made by the AO under section 68 as well as under section 69C is deleted for the reasons mentioned and the appeal of the appellant allowed on merit.