DCIT CIRCLE-5(1), KOLKATA vs. ZEN STOCK AND SHARE BROKING PVT LTD, KOLKATA

Assessment Year 2014-15 DCIT Circle-5(1), Kolkata, Aayakar Bhawan, Chowringhee Square, Kolkata – 700069 ……..…...…………….... Appellant vs. Zen Stock and Share Broking Pvt. Ltd., Kolkata, 9D/2, Jagganath Ghat, Cross Road Posts, Kolkata - 700007 [PAN: AAACZ0933A] ................................. Respondent Appearances by: Assessee represented by : Vikash Garg, AR Department represented by : Arun Kumar Meena, JCIT, Sr. DR Date of concluding the hearing : 16.07.2025 Date of pronouncing the order : 21.07.2025 O R D E R

PER SANJAY AWASTHI, ACCOUNTANT MEMBER

Dates Events/Reasons 30.08.2023 Order of CIT(A) was received in the O/o Pr. CIT-2, Kol. 30.08.2023 The order was received in the O/o DCIT for Appeal scrutiny report from office of PCIT-2, Kolkata 29.10.2023 Due date for filing of 2nd Appeal 02.11.2023 ASR is submitted before the O/o PCIT-2, Kolkata 22.11.2023 Certificate of filing 2nd appeal was received from the O/o Pr.CIT-2, Kolkata 23.11.2023 Necessary hardcopies of documents/paper/details required for filing 2nd Appeal before Hon’ble ITAT, Kolkata were collected and prepared. 24.11.2023 2nd Appeal was filed.

Zen Stock and Share Broking Pvt. Ltd. It is submitted that the appeal could not be filed on or before due date due to huge work load relating to assessments. Therefore, it is requested to kindly condone the delay of 24 days in filing appeal before the Hon’ble ITAT, Kolkata for the sake of substantial justice. Verification I, the undersigned do hereby verify on solemn affirmation in Kolkata that the contents of this affidavit are true to the best of my knowledge and nothing material has been concealed.” 1.1 Considering the reasons given in the said petition, the delay is hereby condoned and the appeal is admitted for adjudication.

1.2 This appeal arises from the order u/s 250 of the Income Tax Act, 1961 (hereafter “the Act”), dated 30.08.2023, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereafter “the Ld. CIT(A)”].

1.3 In this case, the Ld. AO passed an order dated 29.12.2016 through which an allegedly bogus share trading loss amounting to Rs. 4,19,68,680/- was disallowed and added u/s 68 of the Act. The Ld. AO has given a finding that the assessee traded in shares of a listed company in the name and style of M/s Nikki Global Finance Ltd., which is apparently one of 84 companies identified as allegedly providing bogus accommodation entries pertaining to losses or gains in equity trading by the Income Tax Department’s Investigation Wing.

“7.2 I have considered the submissions of the assessee and the assessment order and I find that the appellant company has carried out trading in shares of Nikki Global Finance Ltd. online through the stock exchange and transaction of purchase and sale are reflected in the D-Mat account of the appellant company. Purchase consideration has been paid through banking channels and sale proceeds have been received through banking channels, STT was paid both on purchase and sale of shares. All evidence in form of D-Mat account, contract notes, abstract of transaction furnished by the stock exchange, copy of Bank statements, copy of broker’s account M/s Horizon Portfolio Ltd. were filed during assessment proceedings and appellate proceedings. The Assessing Officer was not able to point out any defect in the evidence/documents filed by assessee, during assessment proceedings, evidencing the transaction.

Zen Stock and Share Broking Pvt. Ltd. 7.3 I also find that the Income Tax department made a reference to SEBI on the basis of report of Director of Investigation (Kol), based on which SEBI commenced its investigation in trading in shares of Nikki Global Finance Ltd. The appellant company filed before me the order of SEBI being order no. WTM/AB/IVD/ID7/10565/2020-21 dated 26/12/2021 wherein it was held that during the period the appellant company purchased and sold shares, SEBI has not found any price rigging or manipulation. The order also mentions the name of the appellant company to have purchased and sold shares during that period. I also find that investigation was carried out by SEBI on 301 entities based on reference by the Income Tax department. After the investigation notices were issued on 109 entities only as no adverse inference was drawn against the appellant company during investigation. 7.4 Neither there is adverse statement on record of the broker M/s Horizontal Portfolio Ltd., nor any action was initiated against the broker by SEBI or the department. Under the above facts and circumstances the onus cast on the assessee to prove the genuineness of the transaction stands discharged and therefore I hold the action of the A.O. disallowing the loss of Rs.4,19,68,680 to be unjustified……………..” 2.1 The Revenue, being aggrieved with this action of Ld. CIT(A), has filed the present appeal with the following grounds:

“1. Whether in the facts and circumstances of case and in law, the Learned CIT(A) was justified in deleting the addition to the tune of Rs. 4,19,68,600/- being bogus loss arising out of trading in shares of M/s Nikki Global finance Ltd ignoring the fact that it is a penny stock and price fluctuations of its shares were tailor made to provide accommodation entries as has been found out by the Investigation Wing and made out in the assessment order?.

2. Whether in the facts and circumstances of case and in law, the Learned CIT(A) was justified in deleting the addition to the tune of Rs.4.19,68,600/- being bogus loss arising out of trading in shares of M/s Nikki Global finance Ltd ignoring the fact the rise and fall of price such shares were not at all correlated and commensurate with the fundamentals of the company? 3. Whether in the facts and circumstances of case and in law, the Learned CIT(A) was justified in deleting the addition to the tune of Rs.4,19,68,600/- being bogus loss arising out of trading in shares of M/s Nikki Global finance Ltd ignoring the fact that the company registered a profit of Rs 0.01 crore, 0.04 crore, 0.03 crore, 0.01 crore during the F.Y.s 2010-11, 2011- 12, 2012-13, F.Y. 2013-14 & F.Y. 2014-15 respectively, yet the price of the shares fluctuated from Rs 11.60/- to Rs 950 and then fell to Rs 115 in four different patches defying all logic and without any plausible reason? 4. Whether in the facts and circumstances of case and in law, the Learned CIT(A) was justified in deleting the addition to the tune of Rs.4,19,68,600/- being bogus loss arising out of trading in shares of M/s Nikki Global finance Ltd ignoring the fact that during the relevant period of assessment the share price of the company underwent the patch 3 of price rise (April 2, 2012 to December 4,2013) when the scrip opened at 126/- and reached a high of Ra 950/- and patch-4 of fall (Decembers, 2013 to May 30,2014)

Zen Stock and Share Broking Pvt. Ltd. when it fell to 115 indicating that the prices of the share were not market driven ? 5. Whether in the facts and circumstances of case and in law, the Learned CIT(A) was justified in deleting the addition to the tune of Rs.4,19,68,600/- being bogus loss arising out of trading in shares of M/s Nikki Global finance ignoring all such facts mentioned above in the order of the SEBI bearing order No. WTM/AB/IVD/ID7/10565/2020-21 dated 26/12/2021 based on which the assessee has been allowed relief and in the way ignoring the theory of preponderance of probability applicable for deciding Income Tax Cases? 6. That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds herein above before or hearing of this appeal.”

3.1 The Ld. AR, on the other hand, vehemently argued with the help of two paper books, one paper book containing 272 pages, containing various documents, including SEBI’s orders and another paper book running into 152 pages in which several judicial pronouncements of High Courts and various Benches of ITAT have been placed before us. The Ld. AR pointed out that in the SEBI’s order under sections 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992, the assessee’s case is mentioned on page 7 at clause “g” and thereafter, the conclusion (on pages 36-37 of SEBI order) was certainly not an adverse one against either the assessee or M/s Nikki Global Finance Ltd. The Ld. AR also pointed out that there was a decision rendered by the Securities Appellate Tribunal, Mumbai through which a finding and direction has been given on page 10 of the said order (page 261 of the paper book) that the SEBI’s order mentioned earlier itself has been termed arbitrary and relief has been granted therein. The Ld. AR argued that the case of the assessee was distinguishable from the Swati Baja case (supra) since the primary agency, being SEBI, itself has not drawn any adverse inference with regard to the share trading pattern. Thereafter, the Ld. AR took us through as many as 11 decisions rendered by various ITAT Benches, including an order dated 17.09.2024 passed by “B” Bench of Kolkata in which the Swati Baja case has apparently been distinguished. The Ld. AR brought our attention to bear on the case of Sawankumar T Jajoo reported in 171 taxmannc.om 26 (Kolkata), whereby the gain arising out of trading in penny stocks has been allowed by the Hon’ble Calcutta High Court. The Ld. AR also relied on the case of Genuine Finance Pvt. Ltd. reported in 152 taxmann.com 330 (Gujarat) and the case of Neelu Mohan Saria reported in 175 taxmann.com 235 (Gujarat).

The report submitted by the Investigation department could not be thrown out on the grounds urged on behalf of the assessees. The assessees have not been shown to be prejudiced on account of non-furnishing of the investigation report or non-production of the persons for cross examination as the assessee has not specifically indicated as to how he was prejudiced, coupled with the fact as admitted by the revenue, the statements do not indict the assessee. That apart, the investigation has commenced targeting the individuals who dealt with the penny stocks and after examining the modus seeing the cash trail the report has been submitted recommending the same to be placed before the DGIT (Investigation) of all the States of the country. It is thereafter the concerned Assessing Officers have been informed to consider as to the bona-fideness and genuineness of the claims of LTCG/LTCL of the respective assessees qua the findings which emanated during the investigation conducted on the individuals who dealt with the penny stocks. Therefore, the assessments have commenced by the Assessing Officers calling upon the assessee to explain the genuineness of the claim of LTCG/LTCL made by them. In all the assessment orders, substantial portion of the investigation report has been noted in full. A careful reading of the same would show that the assessee has not been named in the report. If such be the case, unless and until the assessee shows and proves that she/he was prejudiced on account of such report/statement mere mentioning that non-furnishing of the report or non-availability of the person for cross examination cannot vitiate the proceedings. The assessees have miserably failed to prove the test of prejudice or that the test of fair hearing has not been satisfied in their individual cases. In all the cases, the assessees have been issued notices under sections 143(2) and 142(1) they have been directed to furnish the documents, the assessee have complied with the directions, appeared before the Assessing Officer and in many cases represented by Advocates/Chartered Accountants, elaborate legal submissions have been made both oral and in writing and thereafter the assessments have been completed. Nothing prevented the assessee from mentioning that unless and Zen Stock and Share Broking Pvt. Ltd. until the report is furnished and the statements are provided, they would not in a position to take part in the inquiry which is being conducted by the Assessing Officer in scrutiny assessment under section 143(3). The assessees were conscious of the fact that they have not been named in the report, therefore made a vague and bold statement that the non-furnishing of report would vitiate the proceedings. Therefore, merely by mentioning that statements have not been furnished can in no manner advance the case of the assessee. If the report was available in the public domain as has been downloaded and produced by the revenue, nothing prevented the assessees who are ably defended by the Chartered Accountants and Advocates to download such reports and examine the same and thereafter put up their defence. Therefore, the based on such general statements of violation of principles of natural justice the assessees have not made out any case. [Para 65] To prove the allegations, against the assessee, can be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled and when direct evidence is not available, it is the duty of the Court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be what inferential process that a reasonable/prudent man would apply to arrive at a conclusion. Further proximity and time and prior meeting of minds is also a very important factor especially when the income tax department has been able to point out that there has been a unnatural rise in the price of the scrips of very little known companies. Furthermore, in all the cases, there were minimum of two brokers who have been involved in the transaction. It would be very difficult to gather direct proof of the meeting of minds of those brokers or sub-brokers or middlemen or entry operators and therefore, the test to be applied is the test of preponderance of probabilities to ascertain as to whether there has been violation of the provisions of the Income-tax Act. In such a circumstance, the conclusion has to be gathered from various circumstances like the volume from trade, period of persistence in trading in the particular scrips, particulars of buy and sell orders and the volume thereof and proximity of time between the two which are relevant factors. Therefore, the methodology adopted by the revenue cannot be faulted. [Para 69] A holistic approach is required to be made and the test of preponderance of probabilities have to be applied and while doing so, the court cannot lose sight of the fact that the shares of very little known companies with in-significant business had a steep rise in the share prices within the period of little over a year. The revenue was not privy to such peculiar trading activities as they appear to have been done through the various stock exchanges and it is only when the assessees made claim for a LTCG/STCL, the investigation commenced. As pointed out the investigation did not commence from the assessee but had commenced from the companies and the persons who were involved in the trading of the shares of these companies which are all classified as penny stocks companies. Therefore, the argument of the assessee that the copy of the investigation report has not been furnished, the persons from whom statements have been recorded have not been produced for cross examination Zen Stock and Share Broking Pvt. Ltd. are all contention which has to necessarily fail. To reiterate, the assessee was not named in the report and when the assessee makes the claim for exemption the onus of proof is on the assessee to prove the genuinity. Unfortunately, the assessees have been harping upon the transactions done by them and by relying upon the documents in their hands to contend that the transactions done were genuine. Unfortunately, the test of genuinity needs to be established otherwise, the assessees are lawfully bound to prove the huge LTCG claims to be genuine. In other words if there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of time of little more than one year, the genuinity of such steep rise in the prices of shares needs to be established and the onus is on the assessee to do so as mandated in section 68. Thus, the assessees cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently they are entitled to claim LTCG on their transaction. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise. It is incorrect to argue that the assessees have been called upon to prove the negative in fact, it is the assessees duty to establish that the rise of the price of shares within a short period of time was a genuine move that those penny stocks companies had credit worthiness and coupled with genuinity and identity. The assessees cannot be heard to say that their claim has to be examined only based upon the documents produced by them namely bank details, the purchase/sell documents, the details of the D-Mat Account etc. The assessees have lost sight of an important fact that when a claim is made for LTCG or STCL, the onus is on the assessee to prove that credit worthiness of the companies whose shares the assessee has dealt with, the genuineness of the price rise which is undoubtedly alarming that to within a short span of time. [Para 73] While it may be true that assessees could have been regular investors, investors could or could not have been privy to the information or modus adopted. What is important is that it is the assessee who has to prove the claim to be genuine in terms of section 68. Therefore, the assessee cannot escape from the burden cast upon him and unfortunately in these cases the burden is heavy as the facts establish that the shares which were traded by the assessees had phenomenal and fanciful rise in price in a short span of time and more importantly after a period of 17 to 22 months, thereafter has been a steep fall which has led to huge claims of STCL. Therefore, unless and until the assessee discharges such burden of proof, the addition made by the Assessing Officer cannot be faulted. [Para 75] 4.1 It is clear that the Hon’ble Jurisdictional High Court has taken into consideration the SEBI’s orders and have travelled beyond the findings in such orders to given an adverse finding against all of the assessees involved in the said case. It also deserves to be mentioned Zen Stock and Share Broking Pvt. Ltd. that the Hon’ble Kolkata High Court’s case in the matter of Sawankumar T Jajoo (supra) is on entirely different set of facts and has not touched upon the factual matrix of the Swati Bajaj case. Similar is the position regarding the two Hon’ble High Courts cases relied upon by the Ld. AR.

4.2 Accordingly, it deserves to be held that the Hon'ble Jurisdictional High Court in the case of Swati Bajaj (supra) has examined a large number of companies, whose shares were manipulated by certain share brokers for granting undue benefit to the investors, either in the shape of gain or loss, whenever it was required by a person. Therefore, the very credential of the company, Nikki Global Finance Ltd where investment was made is unreliable because it is part of a list of 84 companies which were investigated by the Investigation Wing of the Income Tax Department and there is a reference of these 84 companies in paragraphs 3 and 52 of the judgement in the case of Swati Bajaj (supra). It is a misplaced averment by the assessee that his case can be segregated from the treatment of other similarly placed investors as dealt with in the case of Swati Bajaj (supra). The argument cannot be accepted to distinguish the judgment of the Hon'ble Jurisdictional High Court simply for the reason that the magnitude of profit or loss is on the lower side in the case of the assessee. As far as the other decisions relied on by the Ld. AR are concerned, it is observed that they neither put forth any argument or law which has not already been discussed by the Hon’ble Jurisdictional High Court. Even at the cost of repetition it needs to be mentioned that all of details contained in the arguments of the Ld. AR have been duly considered by the Hon'ble Jurisdictional High Court and we cannot persuade ourselves to take a different view, particularly qua one company, which is part of the list of 84 companies, where investments were held by the Hon'ble High Court to be bogus. The assessee's investment cannot become genuine because he earned a lesser amount of profit or incurred a lesser Zen Stock and Share Broking Pvt. Ltd. amount of loss and that magnitude of profit or loss is not a decisive factor about genuineness of transaction. Therefore, we do not find any reason to sustain the order of Ld. CIT (Appeals), hence this appeal of Revenue is allowed.