KISHORI PANKAJ AGARWAL,VADODARA, GUJARAT vs. INCOME TAX OFFICER , VADODARA, GUJARAT

The grounds of appeal raised by the assessee are as under:

Appellant craves leave to add, alter or delete any ground(s) either before or in the course of the hearing of the appeal.”

The brief facts of the case are that the assessee bought 10,000 shares of Kappac Pharma Ltd. (KPL) having face value of Rs.20/- on 12/10/2012 through offline transaction. These shares were sold between 07/04/2014 to 20/03/2014 at the sale price of Rs.58,82,804/- through share broker M/s. Emkay Global Financial Services Ltd. and through the platform of stock exchange. The AO noted that KPL was a penny stock and was featuring in the list of DIT (Inv.), Kolkata as a company providing bogus long term capital gains / loss. Relying upon the said report of the Investigation Wing, the AO held that long term capital gains declared by the assessee on the sale of the aforesaid scrip of KPL were bogus and made the impugned additions. The Ld. CIT(A) confirmed the addition so made by the AO.

At the outset, Ld. AR of the assessee has submitted that the issue is squarely covered by the decision of the Co-ordinate Bench of the Tribunal in the case of mother-in-law of the assessee titled

Aggrieved against the same, assessee filed an appeal before Commissioner of Income Tax (Appeals). The Ld. CIT(A) held that the transaction as bogus and confirmed the addition as bogus Penny Stock Long Term Capital Gain and confirmed the addition made by the Assessing Officer.

Aggrieved against the same, the assessee is in appeal before us raising the following Grounds of Appeal:

Appellant craves leave to add, alter or delete any ground(s) either before or in the course of the hearing of the appeal.”

Ld. Counsel Shri P.M. Jaga Sheth appearing for the assessee submitted that the assessee produced all the details of share trading of M/s. Kappac Pharma Ltd.

1. Ld. Counsel further submitted that the Hon’ble Juri ictional High Court in the case of Pr.CIT -Vs- Affluence Commodities P Ltd. [2024] 161 taxmann.com 476, dismissed the Department’s appeal concerning the very same shares of M/s. Kappac Pharma Ltd. as not a penny stock and not rigging of the price of the shares. Therefore the Lower Authorities are not correct in holding KPL as a Penny stock. Ld. Counsel further relied on the decision of this Co-ordinate Bench of this Tribunal in the case of Shivani Ashokbhai Shah -Vs- ITO in ITA No. 517/Ahd/2023 wherein it was held that KPL is not a penny stock shares and the sale of shares is considered as genuine transaction.

2. Ld. Counsel drawn our attention to the recent Hon’ble Supreme Court Judgment in the case of PCIT vs. Kuntala Mohapatra reported in [2024] 160 taxmann.com 608 wherein dismissed the Revenue’s SLP, by holding that shares were purchased via Account Payee cheques, held in a Demat Account for over 12 months and sold through a recognized stock exchange after payment of Security Transaction Tax (STT) then the assessee was eligible to claim exemption u/s. 10(38) for long-term capital gains. Similarly Hon’ble Supreme Court dismissed Revenue’s SLP in the case of PCIT vs. Renu Aggarwal [2023] 153 taxmann.com 579 (SC). Thus Ld. Counsel relied upon various other case laws as cited in Case Laws Compilation:

Per contra, Ld. Sr. D.R. appearing for the Revenue supported the order passed by the Lower Authorities and pleaded to uphold the additions made by the Assessing Officer.

We have given our thoughtful consideration and perused the materials available on record including Paper Book filed by the assessee. It is seen from records, assessee produced complete evidence regarding buying of the shares, demat account for dematerialization of shares, sale transaction, payment received through bank accounts and statement of broker, etc. for verification of genuineness of transaction. Just merely the details of transaction done by the assessee was matching with some pattern of fraudulent transactions done by some third party namely Shri Anand Ramanlal Trivedi, who was the Director of KPL. Further the Assessing officer has erroneously mentioned that the assessee is not a regular investor in shares but purchase of KPL share as the first transaction and thereby denied the claim of exemption u/s. 10(38) of the Act. Whereas the assessee opened the demat account as early as 29-08-2006 with Emkay Share and Stock Brokers Ltd., Mumbai and she is a regular trader/investor of shares from 2006 onwards. In our considered view, merely relying upon the Investigation Wing report of Kolkata, the Ld AO has not even verified the basic details as available in this case. Thus based on surmises and conjectures the A.O. made the addition which is not permissible under the law. Further, there is no mention about the name of the assessee or his broker in the so called Investigation Wing report from Kolkata. Therefore the addition made on this count is not sustainable in law.

1. The Juri ictional High Court in the case of Affluence Commodities Pvt Ltd. (cited supra) held that where assessee purchased and sold KPL shares and incurred loss, since assessee had proved genuineness of transactions and moreover assessee had no control whatsoever on share prices, addition made by Assessing Officer on account of disallowance of losses booked in penny stocks was liable to be deleted by observing as follows:

The 3rd ground namely losses booked under penny stocks of Rs. 73,12,905/- on sale of Alang Industrial Gases Ltd. Shares. The assessee has proved the genuineness of the transactions beyond doubt by furnishing contract notes, ledger accounts, bank transactions from books of brokers whereas the AO without any material evidence disallowed the losses of in scripts of Alang Industrial Gases Itd. And the valuation of the closing stock in Kappac Pharma just bases on the SEBI general information and Investigation Wing. Kolkatta. The AO made the disallowance without documentary proof whereas the assessee proved the genuineness of the transactions and established on online trading platforms and it had no control whatsoever on share prices and thus incurred losses in shares of Alang Industrial Gases Ltd. It is the case of the assessee that it sold only part of the shares and remaining shares have been held by the assessee in subsequent assessment year also. Thus following Juri ictional High Court Judgement, the Ld. CIT(A) deleted the addition.

Respectfully following the above Juri ictional High Court judgements and also the fact that the assessee is a retaining Kappac Pharma shares as stock-in-trade and the closing stock is valued at the market rate. Since the market rate is lower it has incurred a business loss of Rs. 53,02,455/- though the shares are not sold. The difference is only because the valuation of shares which is as per the Accounting standard and the share of Kappac Pharma are still forming part of closing stock of the assessee company as on 31.03.2019. Thus, we have no hestiation in deleting the disallowance made by the AO which was correctly deleted by the 1d. CIT(A). Thus the grounds raised by the Revenue is without any basis and the same is liable to be rejected. The remaining ground Nos. 4 to 6 are general in nature, which does not require specific adjudication."

We have considered the concurrent findings of fact arrived at by the CIT(A) and Tribunal and are in complete agreement with such findings to the effect that the assesse has proved the genuineness of the transactions and established on online trading platforms that it had no control what so ever on share prices and thus, incurred losses in shares of Alang Industries Gas Ltd. It was also found by both the authorities that the assessee sold only the part of the shares and remaining shares have been held by the assessee in the subsequent assessment year also. With regard to shares of Kappac Pharma Ltd., it was rightly held by the Tribunal that since the market rate was lower, the assessee had incurred business loss though the shares are not sold.

In view of the above concurrent findings of fact, no questions of law much less any substantial question of law would arise and accordingly, the appeal, being devoid of any merits, is dismissed.”

2. Similarly the Juri ictional High Court in the case of PCIT vs. Sandipkumar Parsottambhai Patel (cited supra) held that since payments were received through account payee cheques and transactions were done through recognized stock exchange, and there was no evidence that assessee had paid cash in return of receipt through cheque, therefore the Tribunal rightly deleted addition holding that transactions were genuine by observing as follows:

Regarding the statement of Shri Anil Khemka, alleged entry provider, which is reproduced in Assessment Order at Page 8, we note that said statement recorded neither implicate Sun & Shine Worldwide Ltd nor the broker Trade bulls Securities Pvt. Ltd and nor the assessee. We note that physical delivery of shares is proved by the memorandum of transfer of shares stated in the share certificate being registered on 30-10-2012. Regarding the escalation of prices of shares of M/s Sun & Shine Worldwide Ltd., that is, the prices have ITA No. 623/Ahd/2023 [Kishori Pankaj Agarwal vs. ITO] A.Y. 2015-16 - 8 –

We also note that Assessing officer and CIT(A) has relied on the case of Sumati Dayal vs. CIT (214.LIB 8011(SC). We are of the view that said decision is not applicable to the assessee under consideration, as the assessee has successfully demonstrated with help of evidences on record to have made the transaction of purchase and sale of alleged shares. No single material was brought on record indicating name of any of the entry provider taking assessee's name or assessee's broker name. We note that assessee has submitted enough evidences such as:

We note that assessee submitted before lower authorities the share brokers contract note in dicating name of the scrip which was traded on the stock exchange, quantity of equity shares sold; date and time on which such shares had been sold, rate at which sale was executed; stock exchange at which such share had been dealt with; amount of brokerage charged; amount of service tax charged; amount of Securities Transaction Tax charged; amount of BSE transaction charges paid; amount of stamp duty paid. Therefore, evidence with regard to source and purpose for which amount had been received and credited in the books has been submitted and which has not been found false, forged and fabricated. The Identity of the party is established from the contract note itself wherein it has been prominently stated that name of the Share Broker is Mrs. Tradebulls Securities Pvt. Ltd. and that they are member of the Bombay Stock Exchange Ltd. The Demat Account statement evidencing holding of equity shares of Company of which shares have been dealt with at Bombay Stock Exchange and also the quantity which has been sold and the date on which such quantity was sold. The demat account statement, contains BSE settlement number which is very much matching with settlement number appearing in the contract note issued by the share broker. The Bank

In the light of the documents and evidences submitted by the assessee, we find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/ unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that Id. DR could not controvert the facts which are supported with material evidences furnished by the assessee. We note that the allegations that the assessee/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. At the cost of repetition, we note that the assessee had furnished all relevant evidences in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the Id. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidences clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s.10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence. In the aforesaid facts and circumstance, for allowing the appeal we rely on the decision of the Hon'ble Calcutta High Court in the case of M/s Alipine Investments in ITA No. 620 of 2008 dated 26th August, 2008 where in the High Court held as follows:

In the aforesaid facts and circumstances of the case, we hold that the ld.CIT(A) was not justified in upholding the addition of sale proceeds of the shares as undisclosed income of the assessee u/s 68 of the Act. We therefore delete the addition of Rs. 33,15,263. 28. Since, we have deleted the main addition of Rs. 33,15,263/-, therefore, the addition on account of commission payment of Rs. 3,29,188/- which is consequential in nature, and hence the same is here by deleted.'

Having regard to the aforesaid finding of facts recorded by the Tribunal, we are not inclined to interfere in this appeal.

We are of the considered opinion that question of law formulated by the Revenue is more on facts rather than on law. It cannot be said to be a substantial question of law.

In the result, this appeal fails and is hereby dismissed. In view of the aforesaid, the connected Tax Appeal No. 521 of 2022 also stands dismissed.”

3. The Hon’ble Apex Court in the case of PCIT vs. Kuntala Mohapatre (cited supra) deleted the addition made on account of statement from entry operators who are unrelated parties with the assessee by observing as follows:

4. The Hon’ble Supreme Court in the case of PCIT vs. Renu Aggarwal (cited supra) dismissed the SLP filed by Revenue by observing that no material relating to assessee was found in investigation wing report, additions made by Assessing Officer had rightly been deleted as follows:

Further the Co-ordinate Bench of this Tribunal in the case of Shivani Ashokbhai Shah (cited supra) have considered many other decisions of this Tribunal wherein it was held that KPL share are not a penny stock share by observing as follows:

We have considered the entire set of judgments relied upon by the assessee and order passed by the ITAT in identical case, we find substance in such submission advanced by the Ld. Counsel appearing for the assessee that the issue is squarely covered by the judgment in case of Shri Prakash Javia Huf vs. ITO & Ors. in ITA No.464/Ind/2019 & Ors., wherein the scrip of M/s. Kappac Pharma Ltd. has been held to be genuine and the claim under Section 10(38) of the Act has been allowed with the following observations:

The assessees namely Prakash Javia HUF, Jayesh Kumar Javia HUF and Prajash Javia purchased equity shares of Kappac Pharma Limited totaling to 3000, 2000 & 3000 respectively in cash through offline mode from existing shareholder of Kappac Pharma Ltd. at Rs.36000/-, Rs.24,000/- & Rs.36,000/-. Subsequently, during the F.Y. 2013-14 all these equity shares were converted in DMAT form maintained by respective assessees with Kotak Securities Ltd. During F.Y. 2013-14 after holding the shares for more than 12 months, respective assessee(s) sold their holding of Kappac Pharma Ltd. through a registered broker namely Kotal Securities Ltd on the recognized stock exchange namely Bombay Stock Exchange Ltd and Long term Capital Gain calculated in each case have been shown in the income tax returns as exempt income u/s 10(38) of the Act.

During the assessment proceedings the assessing officer on the basis of report of the investigation carried out by the Investigation Wing of Income Tax Department at various brokers in other parts of the country, lack of information from the purchaser of equity shares sold by one of the assessee namely Prakash Javia HUF and raising doubt on the abnormal increase of the share price of Kappac Pharma Ltd. which in no way could termed as a fair market value looking to the financial position, gross sales and income shown by the listed company KPL and based on all these observations concluded that the alleged transactions of sale of equity shares of KPL are bogus, Kappac Pharma Ltd. is a penny stock company, and the assessee has adopted a colorable devise to convert unaccounted money into accounted money by arranging bogus LTCG.

As far as, the contention that share prices of Kappac Pharma Ltd. saw abnormal rise which is not commensurate to the financial results/position of the company, we find that this tribunal has dealt with this issue recently in the case of Aditya Mundra (supra) observing as follows:

The above finding of this Tribunal indicates that there are various other factors for the sudden rise and fall in the share prices of a listed company which are majorly linked to the market sentiments, performance of the sector, availability of shares i.e demand and supply, holding of the promoters, future prospects etc. In the instant case, nothing on record is available to show that any enquiry was conducted by department at the business premises of Kappac Pharma Ltd. and its involvement in this alleged racket of managing bogus LTCG. Kappac Pharma Ltd. is registered with