Loading judgment…
Facts
The assessees claimed exemption on long-term capital gains from the sale of shares. The Assessing Officer (AO) reopened the assessment based on an investigation wing report stating the shares were from penny stock companies and the gains were bogus. The CIT(A) confirmed the AO's additions.
Held
The Tribunal held that the AO relied heavily on a generalized investigation report without establishing its applicability to the specific transactions of the assessees. The AO did not provide material to prove the transactions were part of a manipulation scheme. The Tribunal followed the Bombay High Court's decision in PCIT vs. Indravadan Jain HUF.
Key Issues
Whether long-term capital gains from share transactions can be treated as unexplained income based solely on a generalized investigation report without specific evidence linking the assessee's transactions to market manipulation.
Sections Cited
68, 143(3), 153A, 148, 133(6]
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI RAJ KUMAR CHAUHAN
The appeal of Shri Rajesh M Trivedi was earlier disposed of by the co- ordinate bench by an ex-parte order dated 31-01-2023. Similarly, the appeal of Shri Mukesh M Trivedi was also disposed of by the co-ordinate bench earlier by an ex-parte order dated 07-02-2023. Subsequently, both the assessees filed miscellaneous applications seeking recall of the order passed in their appeals ex-parte. The miscellaneous application filed by Shri Rajesh M Trivedi was numbered as M A No.413/Mum/2023 and the earlier order was recalled in the order dated 30-08-2023 passed against the above said miscellaneous application. The miscellaneous application filed by Shri Mukesh M Trivedi was numbered as M A No.412/Mum/2023 and the earlier order was recalled in the order dated 27-10-2023 passed against the above said miscellaneous application. Accordingly, both these appeals came to be placed before this bench again for hearing afresh.
The facts relating to the issues contested by both the assessees are identical in nature. They are stated in brief. Both the assessees are sons of Shri Manuprasad Trivedi, who is a civil contractor undertaking sub-contract works from SMC Group. A search action was undertaken in the hands of SMC group on 23-05-2012. Consequent thereto, the assessment of the year under consideration was completed in the hands of both the assessees herein u/s 143(3) r.w.s 153A of the Act. Both the assessees had claimed exemption of long term capital gains declared by them on sale of shares of M/s NCL Research and Services Ltd and M/s Tuni Textile Mills Ltd. It was accepted by the AO in the above said assessment proceedings.
3.1 Subsequently, the AO received information that the long term capital gains on sale of shares of above said two companies, viz., M/s NCL Research and Services Ltd and M/s Tuni Textiles Mills Ltd declared by the assessees & 2141/Mum/2022 Mukesh M. Trivedi & Anr. are bogus in nature, since both the above said companies have been identified as penny stock companies by the investigation wing of Income tax department. We notice that Shri Mukesh M Trivedi had claimed exemption of long term capital gains of Rs.83,31,639/- and Shri Rajesh M Trivedi had claimed exemption of long term capital gains of Rs.90,01,964/-. Based on the information given by the investigation wing, the AO entertained the reason to believe that there was escapement of income in the hands of both the assessees herein in the form of wrongly allowing exemption to the bogus long term capital gains. Accordingly, he reopened the assessment of the year under consideration in the hands of both the assessees herein by issuing notice under section 148 of the Act.
In the reopened assessment, the Assessing Officer referred extensively to the report given by the investigation wing with regard to the modus operandi followed by the operators to generate bogus long term capital gains. Based on the same, the assessing officer issued show cause notices to both the assessees herein. In reply thereto, both the assessees submitted that they are regular investors in shares and they have purchased the shares of above said companies online through a registered broker in the stock exchange platform by paying consideration through banking channels. It was submitted that the shares were also sold through a registered broker in stock exchange platform only. The assessees furnished evidences in support of purchases and sales of shares of above said companies. Accordingly, both the assessees contended that their transactions of purchase and sale of shares of above said companies should not be doubted with. Both the assessees relied on various case laws to reiterate their contention that once the purchase and sale of shares are proved, their transactions should be accepted.
4.1 The AO, however, did not accept the contentions of the assessee. He relied upon the report given by the Investigation wing, wherein it was stated & 2141/Mum/2022 Mukesh M. Trivedi & Anr. that certain brokers were manipulating prices of shares of penny stock companies in order to generate bogus long term capital gains. The Assessing Officer also noticed that the shares sold by the investors are usually purchased by certain set of peoples categorized as Exit Providers. The AO issued notices u/s 133(6) of the Act to some of the Exit providers, but did not get any response from them. The AO, then referred to the report of the investigation wing with regard to unusual rise in the prices of shares, which were not commensurate with the financial strength of both the above said companies. He also referred to the statements given by the directors of M/s. Tuni Textiles Mills Ltd, wherein they had admitted that the prices of shares of that company were manipulated. Accordingly, by placing his reliance fully on the report of the investigation wing, the Assessing Officer took the view that the long term capital gains declared by both the assessees is bogus in nature. Accordingly he assessed the long term capital gains of Rs.83,31,639/- and Rs.90,01,964/- declared by Shri Mukesh M Trivedi and Shri Rajesh M Trivedi respectively as bogus and accordingly assessed them as unexplained income under section 68 of the Act in their respective hands.
Both the assessees filed appeals before the learned CIT(A) challenging the additions so made by the AO. It was submitted that the assessees that they are regular investors in shares. Further, these shares were purchased and sold through stock exchange platform in the normal course of making investment in securities. It was submitted that the assessees have furnished all documents to prove the purchases and sales. Accordingly, it was pleaded that there was no reason to suspect the genuineness of the transactions merely for the reason that the shares of both the above said companies have been identified as penny stock by the Investigation wing. However, the Ld CIT(A) was not convinced with the contentions of the assessees and accordingly confirmed the addition made by the AO in their hands. Hence, both the assessees have filed these appeals before the Tribunal.
& 2141/Mum/2022 Mukesh M. Trivedi & Anr.
The Learned AR submitted that the Assessing Officer has placed his reliance entirely on the report given by the investigation wing and he did not disprove any of the evidences furnished by the assessees to prove the factum of purchase and sale of shares. He submitted that the shares were purchased and sold through stock exchange. Further, the payment was made/received through banking channel in respect of purchase/sale of shares. Further, the shares have entered into/exited from the Demat account of the assessee upon purchase/sale. Further, it is not an isolated case of transaction of purchase of shares entered by the assessees, i.e., both the assessees are regular investors and they are holding shares of other companies also. Accordingly, the Ld A.R contended that the Assessing Officer could not have doubted the genuineness of the purchase and sale of shares. In support of her contentions, the learned AR placed her reliance on the decision rendered by the co-ordinate bench in the cases of Abhishek Doshi vs. ACIT (ITA 3122/Mum/2022) and Farzad Sheriar Jehani vs. ITO (ITA No.2065/Mum/2023) and also the decision rendered by Hon'ble Bombay High Court in the case of PCIT Vs. Indravadan Jain, HUF (Income Tax Appeal No. 454 of 2018 dated 12.7.2023).
The Learned DR, on the contrary, submitted that the investigation wing has conducted detailed enquiries about both these companies and have proved that the prices of above said companies have been manipulated to generate bogus long term capital gains. Further, the notices issued by the Assessing Officer under section 133(6) of the Act to the exit providers have not been responded to. He further submitted that the some of the operators have admitted before the Kolkata investigation wing that they have been providing accommodation entries in the form of bogus long term capital gains. Accordingly the learned DR submitted that the assessees have not proved the genuineness of the purchase and sale of shares of above said companies, in the back ground of investigation report.
& 2141/Mum/2022 Mukesh M. Trivedi & Anr.
In the rejoinder, learned AR submitted that the SEBI has not conducted any enquiry with both these assessees. Both the assessees have purchased shares at the then prevailing price from the stock exchange platform in the ordinary course. Subsequently, they were sold in the stock exchange platform at the then prevailing prices. The AO has not found any discrepancy or deficiency in the documents furnished by the assessee. The Ld A.R further submitted that the facts prevailing in these two cases are identical with the decision rendered by Hon'ble Bombay High Court in the case of Indravadan Jain, HUF (supra), wherein also similar disallowance made by the AO was deleted. Accordingly she prayed that the additions made by the Assessing Officer may kindly be deleted.
We heard rival contentions and perused the record. We notice that the assessing officer has primarily placed reliance on the report given by the Investigation wing of the Income tax department, Kolkatta in order to arrive at the conclusion that the long term capital gains reported by the assessee is bogus in nature. We notice that the investigation report prepared by Investigation wing, Kolkatta is a generalized report with regard to the modus operandi adopted in manipulation of prices of certain shares and generation of bogus capital gains. We notice that the AO has placed reliance on the said report without bringing any material on record to show that the transactions entered by the assessee were found to be a part of manipulated transactions, i.e., it was not proved that the assessee has carried out the transactions of purchase and sale of shares in connivance with the people who were involved in the alleged rigging of prices. The Ld A.R also submitted that the regulator of stock market SEBI has not conducted any enquiry against the assessees.
We notice that the assessee has furnished reply to the notice issued by the AO and the AO could not find any adverse features from the said reply. Further, the AO also could not disprove the share transactions by bringing any material on record. We also notice that the assessees have & 2141/Mum/2022 Mukesh M. Trivedi & Anr. (a) purchased and sold these shares by paying consideration through banking channels and through stock exchange platform. (b) the shares were received and issued through the Demat account of the assessee. The Ld AR submitted that both the assessees are regular investors in shares. Further, the AO has not found any defect/deficiencies in the evidences furnished by the assessee with regard to purchase and sale of shares. Further, the AO has not brought on record any material to show that the assessee was part of the group which involved in the manipulation of prices of shares. We notice that the shares were purchased in an earlier year and the said purchase has not been suspected by the AO. Hence, we are of the view that there is no reason to suspect the purchase and sale of shares undertaken by the assessee.
We noticed that though the AO placed reliance on the report of investigation wing, yet he did not establish that the said reports of investigation wing would be applicable to the facts prevailing in the present cases. Whenever, a generalized report is received by the AO, it is his duty to examine as to whether the transactions undertaken by the assessee are that of the nature reported by the investigation wing. Without establishing that, in our view, the AO was not justified in rejecting the genuineness of the transactions undertaken by the assessees. At this stage, we may refer to the decision rendered by Hon’ble Supreme Court in the case of Adamine Construction P Ltd (99 taxman 45), wherein, while dismissing the appeal of Revenue, the Hon’ble Supreme Court has referred to the following observations made by Hon’ble Delhi High Court:-
“What is evident is that the AO went by only the report received and did not make the necessary further enquiries – such as into the bank accounts or other particulars available with him but rather received the entire findings on the report, which cannot be considered as primary material. The assessee had discharged the onus initially cast upon it by
Further, we noticed earlier that that the shares were purchased and sold by the assessees through the stock exchange platform. In the case of PCIT vs. Indravadan Jain HUF (ITA No.454 of 2018 dated 12th July, 2023), the Hon’ble Bombay High Court held as under:-
“….The CIT(A) came to the conclusion that respondent bought 3000 shares of RFL, on the floor of Kolkatta 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 Kolkatta 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 instruction slips and also received payment from Kolkatta Stock Exchage. 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 notice that the facts available in the present cases are similar to the above said case decided by Hon’ble Bombay High Court. Accordingly, following above said decision, we hold that, in the facts and circumstances of the instant cases, there is no reason to suspect the genuineness of purchase and sale of shares undertaken by both the assessees in the shares of above said companies. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in the hands of both the assessees and direct the AO to delete the addition made by him in respect of long term capital gains.
Both the assessees have raised a legal ground challenging the validity of reopening of assessment. Since we have deleted the addition made by the AO on merits, the above said legal issue is rendered academic in nature. Accordingly, we leave it open.
In the result, the appeals filed by both the assessees are allowed.
Order pronounced in the open court on 18 March, 2025.