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Facts
The assessee, a non-resident, traded in shares of Kushal Ltd. and incurred a Short Term Capital Loss (STCL). The Assessing Officer (AO) treated the STCL as bogus, denied carry forward, and added the sale consideration and commission expenses. The Dispute Resolution Panel (DRP) upheld the AO's additions. The assessee appealed.
Held
The Tribunal held that the AO and DRP failed to establish a direct nexus between the assessee and the alleged price rigging or bogus transactions. Relying on previous decisions and supporting documentation, the Tribunal found the transactions to be genuine and deleted the additions.
Key Issues
Whether the STCL from the sale of Kushal Ltd shares is bogus and whether the sale consideration and commission expenses can be added to income without establishing a direct nexus with alleged price rigging.
Sections Cited
147, 144C(13), 68, 69C, 10(38)
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI RAJ KUMAR CHAUHAN, JM
(Assessment Year: 2018-19) Subramania Sreenivasa ITO, Ward-2(3)(1), Room No. 1727, 17th Floor, Ganeshanatha, P O Box 2436 PC 112, RUWI, Vs. Air India Building, Nariman Point, Oman. Mumbai-400021. PAN: AKGPG0606E Appellant) : Respondent) Appellant /Assessee by : Shri Hiran C. (Virtually Present), AR : Shri Krishna Kumar- Sr. DR Revenue / Respondent by : 02.04.2025 Date of Hearing Date of Pronouncement : 04.04.2025 O R D E R Per Padmavathy S, AM:
This appeal by the assessee is against the final order of assessment passed by Income Tax Officer (IT)-Ward-2(3)(1), Mumbai (for short ‘the AO’) passed under section 147 r.w.s 144C(13) of the Income Tax Act, 1961 (the Act) dated 29.1.2024 for Assessment Year (AY) 2018-19. The assessee raised the following grounds of appeal:
Subramania Sreenivasa Ganeshanatha “1. The order u/s 147 r.w.sec. 144C(13) passed by the Assessing Officer, though with the directions of the Disputes Resolution Panel, is contrary to law, facts and circumstances of the case.
2. The Appellant submits and states that there was neither search nor survey in his premises as wrongly mentioned in the order of assessment (para 21- "considering the findings of the search/survey, inquiries conducted in the case of the assessee"). The Appellant further submits that he never visited India during the year under appeal and being a Salaried Non-Resident employee. he was incapable of having and converting unaccounted income-a presumption attached to the order of assessment.
The Appellant submits and states that he made all transactions for trading only through Non Resident External A/c of the Bank with D-mat a/c the statement of which is attached along with this Appeal Form for perusal of the Hon'ble members of the Tribunal.
The investigation said to be conducted by the Department with the penny stack company speaks nothing about the Appellant and there was nothing for the Appellant to derive benefit but to suffer loss unknowingly. The Appellant further submits and states there was no adverse comments against the Appellant by any of the persons giving statements before the Officers of the Investigation Wing of the Department. No adverse statement or piece of evidence against the Appellant was brought on in the order of assessment.
5. In this connection, the Appellant relies on the decision of the Supreme Court decision in the case of PCIT Vs. Renu Aggarwal dt. 3.7.2023 wherein it was held: Section 69A read with sec. 10(38) of the Income-tax Act 1961- Unexplained moneys (share dealings) High Court by the impugned order held that where Assessing Officer disallowed exemptions claimed by the assessee u/s 10(38) and made additions, alleging involvement in penny stock which were being misused for providing bogus accommodation of LTCG, however, there was lack of adverse comments from stock exchange and officials of company involved in these transactions and no material relating to assessee was found in investigation wing report, additions made by Assessing Officer had rightly been deleted. WHETHER SLP FILED BY REVENUE AGAINST SAID IMPUGNED ORDER WAS TO BE DISMISSED? - HELD YES (Para 2) (in favour of assessee).
6. The Appellant submits and states that the addition u/s 68 of the Act and the addition of commission expenditure u/s 69C based on presumptions and Subramania Sreenivasa Ganeshanatha concept of human probability without bringing on record any materials linking the assessee in any of the dubious transactions relating to entry is not sustainable as held by the ITAT Delhi in the case of Rachana Gupta Vs. ACIT (ITA No.5418/Del/2018dt. 20.12.2024 relating to assessment year 2016-17) 7. In the Appellant's own case, on second appeal by Revenue for the earlier assessment year, the Hon'ble ITAT has decided the very same issue against the Revenue and in favour of the Appellant (ITA No.2439/MUM/2024 dt. 14.1.2025 For all the above and any other submissions that may be made at the time of hearing, it is prayed that the order of the AO in so far as it relates to the additions be deleted and justice rendered.”
The assessee is an individual non-resident employed in Muscat since 2002. For the AY 2018-19 the assessee filed the return of income on 07.08.2018 declaring total income of Rs. 75,920/-. The AO received information from DDIT(Inv.), Ahmadabad based on search and seizure conducted in the case of Kushal Group of Companies, Ahmadabad stating that Kushal Group is involved in price rigging and provide bogus accommodation entries in the form of bogus Long Term Capital Gain / Loss and Short Term Capital Gain / Loss. The AO noticed that during the year under consideration, the assessee has sold shares of one of the alleged bogus companies namely Kushal Ltd. and has incurred a Short Term Capital Loss (STCL) of Rs. 29,02,792/-. The AO treated the STCL as bogus and denied the benefit of carry forward of the said loss. The AO also treated the entire sale consideration amounting to Rs. 3,58,99,304/- as addition under section 68 of the Act. The AO also made an addition at 3% towards the commission as addition under section 69C of the Act. The assessee raised its objections before the Dispute Resolution Panel (DRP). The DRP rejected the contentions of the assessee and upheld the addition made by the AO. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO pursuant to the directions of the DRP.
Subramania Sreenivasa Ganeshanatha 3. The ld. Authorized Representative (AR) at the outset submitted that the issue is covered by the decision of the Co-ordinate Bench in assessee’s own case for AY 2017-18 (ITA No.2439/MUM/2024 dated 14.01.2025) in which the assessee has earned STCG by sale of the alleged bogus scrip of Kushal Ltd and that the Co- ordinate Bench has dismissed the appeal filed by the revenue confirming the CIT(A)'s order deleting the additions made by the AO under section 68 of the Act. On merits, the ld. AR submitted that the assessee has purchased the shares through the Demat A/c and the payments have been made through NRE A/c with Axis Bank. The ld. AR further submitted that assessee is a regular investor and for the year under consideration, the assessee has declared a total loss of Rs. 1,86,46,184/- out of trading in various scrip. The ld. AR further submitted that the DRP while confirming the disallowance has held that the nexus between the alleged accommodation entry providers and the assessee need not be established which is not correct. The ld. AR submitted that the AO and the DRP have not recorded any adverse findings with regard to the various documentary evidences submitted by the assessee but has held the transaction to be bogus based on the survey happened in the case of Kushal Group of company. Accordingly, the ld. AR submitted that the addition made by the AO cannot be sustained.
4. The ld. Departmental Representative (DR) on the other hand relied on the order of the AO and the directions of the DRP.
We have heard the parties and perused the material on record. The AO during the course of assessment received information from DIT (Inv.) and the assessee having transacted in one of the alleged penny stock shares namely Kushal Ltd. The AO disallowed the carry forward of STCL claimed by the assessee towards the sale of Kushal Ltd for the reason that the transaction is bogus. The AO also made Subramania Sreenivasa Ganeshanatha addition under section 68 treating the entire sale consideration as unexplained and made further addition under section 69C of the Act towards the commission on the alleged bogus sale consideration. The DRP confirmed the addition made by the AO by holding that “ The transactions in the tainted scrip itself are the indicator that the applicant has been a beneficiary of market manipulation. There is no necessity for the Assessing Officer to establish any further nexus. The applicant has not been able to establish the purchase transaction and the source of acquisition of the Kushal Ltd. shares before the A.O. In view of the above, the objections No. 1 to 3 of the Applicant fail. The action of the Assessing Officer in terms of rejection of losses and assessment of Kushal Ltd. scrip sale credits under section 68 and out-of-books commission expenditures under section 69C (as expenditure from unexplained sources) for the availing of credit entry is sustained.”
We notice that the assessee has submitted the Demat statement, Bank statement, etc. before the lower authorities in support of the impugned transaction and that the AO in the assessment order has acknowledged the same. We further notice from the perusal of the computation of income (page 5 of paper book) pertaining the year under consideration, that the assessee has transacted in number of scrip during the year under consideration which resulted in total STCL of Rs. 1,86,46,184/- and that the alleged bogus scrip of Kushal Ltd. is a part of the list of scrip traded by the assessee (page 8 to 12 of paper book). We also notice that entire transaction of purchase and sale of various scrip is routed through assessee's demat account and that the funds for the acquisition of shares of Kushal Ltd. are reflected in the Bank statement of the NRE a/c with Axis Bank (page 15 to 17 of paper book). Therefore we are unable to find merit in the findings of the DRP that the assessee has not explained the purchases and the source of acquisition before the AO. We further notice that the assessee for the AY 2017-18 has traded in the alleged bogus scrip of Kushal Ltd. and has earned the STCG which was treated as bogus by the AO in the said AY. The CIT(A) deleted the addition considering the issue on merits Subramania Sreenivasa Ganeshanatha against which the revenue filed appeal before the Tribunal. The Co-ordinate Bench of the Tribunal while considering impugned issue in AY 2017-18 in assessee’s case (supra) has held that
On perusal of the impugned order passed by the CIT(A) we find that the findings returned by the Assessing Officer were overturned by the CIT(A) in the following manner: “6. Decision: During the year under consideration, the appellant sold scrip Kushal Limited of Kushal Group. The assessing officer treated the above company a fake company/penny stock and brought to tax the whole sale consideration of Rs.3,86,67,529/- as unexplained cash credit under section 68 of the Income Tax Act, 1961 treating the transactions as sham transactions. The assessing officer further held that the appellant might had also paid commission of 3% amounting to Rs.11,00,026/- to procure the entries of above sham transactions and taxed the same under section 69C of the Act being unexplained expenditure. 6.1. On perusal of the assessment order, it is seen that the assessing officer has relied upon the statement of one Shri Ashish Pannalal Shah recorded under section 131 of the Act by the Investigation Wing of the Department during the course of action under section 132 of the Act in the case of Kushal Group. As per the assessing officer, Shri Ashish Pannalal Shah had accepted that he was providing market manipulation services to companies and thereby rigging the share price to a certain level as desired by companies and for that he had received commission from these companies. As per the assessing officer, Shri Ashish Pannalal Shah had also accepted that he had used accounts of others for his market manipulation work. The assessing officer finally added the sale consideration amount of Rs.3,86,67,529/- as unexplained cash credit under section 68 of the Act. The assessing officer also made addition of Unexplained expenditure of Rs. 11,60,026/- under section 69C of the Act to the total income of the appellant. 6.2. The appellant is an NRI. The transactions are claimed to have taken place from the NRE Account of the appellant. The appellant has furnished statement on transactions in Kushal Scrips, bank statement, statement of capital gain from broker. The Short Term Capital Gain on the sale of shares has been offered to tax by the appellant. The appellant had purchased the shares which were transferred to his Demat Account, and, no specific allegation has been made by Shri Ashish Pannalal Shah Subramania Sreenivasa Ganeshanatha against the appellant on the above purchase & sale of shares of Kushal Limited/Kushal Group by the appellant. The assessing officer has not pointed out from the statement of Shri Ashish Pannalal Shah that he (Ashsish Pannalal Shah) had taken the name of the appellant with regard to obtaining any benefit on the issue of such bogus /sham transactions of shares of Kushal Limited/Kushal Group. The sale of shares of Kushal Limited/Kushal Group has taken place through the demat account. 6.3 The ratio of the decision of the Hon'ble Supreme Court in the case of Pr. CIT Vs. Renu Aggarwal (WP for SLP Nos. 13033 of 2023 dated 03/07/2023 and the ratio of the decision of the Hon'ble Bombay High Court in the case of Pr. CIT Vs. Indravadan Jain, HUF (ITXA No. 454 of 2018) dated 12/07/2023 as relied upon by the appellant is found to be applicable to the present appellant's case. 6.4 In view of the above, it cannot be said that the purchase and sale of the shares of Kushal Limited/Kushal Group was bogus in nature and the transactions of purchase and sale were sham transactions. 6.5 In addition to above, it may also be mentioned here that the amount of sale consideration on sale of shares of Kushal Limited/Kushal Group is not pointed out by the assessing officer that the same was found recorded in the books of account of the appellant. Hence, one of the conditions to invoke provisions of section 68 of the Act in the case of the appellant is not found to have been satisfied by the assessing officer. 6.6. Cumulatively considering the facts & circumstances of the case, and the legal position prevailing over the issue, as discussed above, addition made under section 68 of the Act amounting to Rs.3,86,67,529/- and the addition made under section 69C of the Act amounting to Rs.11,60,026/- are deleted………” (Emphasis Supplied) 8. The above findings returned by the CIT(A) have gone uncontroverted during the appellate proceedings before us. We note that the Assessee has been settled outside India since 2002 and is stated to have been actively investing his savings in the Indian Share Market since 2006-07. During the relevant previous year the Assessee had purchased and sold shares of Kushal Limited. In the return of income filed in response to notice issued under Section 142(1) of the Act, the Assessee had offered to tax the short term capital gains income arising from sale of shares of Kushal Limited during the relevant previous year. The Assessing Officer treated the aforesaid transactions undertaken by the Assessee was held by the Assessing Officer to be in the nature of accommodation entry while the CIT(A) accepted the Subramania Sreenivasa Ganeshanatha contention of the Assessee and held the transaction to be genuine in nature. On perusal of the material on record, we find that the Revenue has failed to bring any material on record to persuade us to take a view of the matter different from that of the CIT(A). On perusal of paper-book filed by the Assessee we note that the findings returned by the CIT(A) are supported by the material on record which includes computation of capital gains and computation of income for the Assessment Year 2017-18, relevant extract of Demat Account of the Assessee, Bank Statement of the Assessee for the relevant period and the Bank Statement of NRI Account. The aforesaid material on record shows that both purchase and sale transactions were made through stock exchange during the relevant previous year and the Assessee had earned Short Term Capital Gain from the purchase/sale transactions under consideration. A perusal of the Assessment Order shows that the Assessing Officer has moved on the premise that the Assessee has entered into transactions under consideration with the object of exploiting the Long Term Capital Gains exemption under Section 10(38) of the Act whereas the Assessee has earned Short Term Capital Gains which have been offered to tax. The payments for purchase/sale of shares are reflected in the Bank Statements and the same reconcile with the entries in the Demat Account Statement. We note that the Assessing Officer has made the addition by primarily relying upon the report of investigation wing and had not carried out any independent inquiry or verification. Thus, while the Assessee had discharged the primary onus, the Revenue had failed to bring on record any material/information to shift the onus back onto the Assessee. Thus, we confirm the order passed by the CIT(A) deleting the addition of INR.3,86,67,529/- made by the Assessing Officer under Section 68 of the Act. Consequently, we also confirm the order of CIT(A) deleted the addition of deemed commission expenses of INR.11,60,026/- (3% of INR.3,86,67,529/-) made by the Assessing Officer under Section 69C of the Act. Accordingly, Ground No.1 raised by the Revenue is dismissed.
We notice that the assessee has traded in the same shares of Kushal Ltd. for the year under consideration and has submitted all the relevant documents before the lower authorities which are similar to facts as considered by the Co-ordinate Bench in the above case. We therefore see merit in the submission that the above findings of the Co-ordinate Bench in assessee's case for AY 2017-18 is applicable for the year under consideration also. It is also relevant to mention here that the AO though has recorded a detailed finding with respect to the finances of Kushal Ltd. and the Subramania Sreenivasa Ganeshanatha modus operandi with regard to the price rigging etc., the AO has not recorded any specific finding linking the assessee to the alleged price rigging and that the assessee's name is not appearing in the statement recorded or any other material found during survey. It is a settled position that unless the assessee is established to have direct nexus with the price rigging and is being named as involved in the alleged bogus transactions, the addition under section 68 of the Act towards trading in alleged bogus scrip cannot be sustained. In view of these discussions and respectfully following the decision of the Co-ordinate Bench, we hold that the AO is not correct in denying the benefit of carry forward of STCL in the hands of the assessee and that the addition made under section 68 and 69C of the Act towards the sale consideration and commission is not sustainable. The grounds raised by the assessee in this regard is allowed