INCOME TAX OFFICER 1(1)(3), AHMEDABAD, AHMEDABAD vs. SURESHKUMAR BHIKALAL THAKKER, AHMEDABAD

This appeal has been filed by the Department against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 18.07.2025 passed for A.Y. 2015-16.

The Department has raised the following grounds of appeal:

The brief facts of the case are that the assessee, an individual, filed his return of income for the Assessment Year 2015-16 declaring total income of Rs. 13,18,980/-. The case was reopened under section 147 of the Income-tax Act, 1961 (the “Act”), on the basis of information received from the Investigation Wing, Ahmedabad, that the assessee was one of the beneficiaries of accommodation entries in respect of bogus Long-Term Capital Gains (LTCG) arising from transactions in penny stock shares of Safal Herbs Ltd., a company identified by the Department as having no genuine business operations and whose share prices were manipulated to generate fictitious exempt capital gains.

During the reassessment proceedings, the Assessing Officer noted that the assessee had shown sale of shares of Safal Herbs Ltd. during the year for Rs. 6,73,285/-. According to the Assessing Officer, the assessee failed to substantiate the genuineness of the transactions or to provide any credible evidence explaining the source of investment or the justification for the phenomenal rise in the share price. The Assessing Officer held that the entire transaction was a mere accommodation entry to convert unaccounted money into exempt capital gains. Consequently, the sale consideration of Rs. 6,73,285/- was treated as unexplained income under section 69A of the Act. The Assessing Officer observed that the assessee had failed to furnish any satisfactory explanation for the abnormal increase in the share price and had merely relied upon paper documents such as contract notes and bank statements, which, according to him, were insufficient to establish genuineness in the light of the investigation findings.

We have heard the rival contentions and perused the material on record. On going through the facts of the case and arguments of both the sides, we are of the considered view that the Counsel for the assessee has not been able to furnish the precise date of purchase of the impugned penny stock shares. Further, a perusal of the assessee’s own demat statement reveals that he holds a small and diversified portfolio consisting of only 75 shares of Adani Ports, 108 shares of ICICI Bank, 713 shares of NHPC, 32 shares of Omaxe Ltd., and 12 shares of Reliance Industries Ltd.-all established companies with recognized financial standing. In this background, the sudden acquisition of 31,000 shares of Safal Herbs Ltd., an obscure company with no known financial credibility or commercial substance, defies logic and normal human conduct. The assessee has failed to justify the rationale for such an investment or to explain why he chose to deal exclusively in a company with no business history. Moreover, the shares were held for a relatively short period, and the assessee has not been able to demonstrate that he was holding these shares as an investor for the long term. This conduct, viewed cumulatively, supports the conclusion that the transactions were prearranged to generate exempt income in the guise of LTCG.

The Hon’ble Calcutta High Court in Principal Commissioner of Income-tax v. Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta)/[2022] 288 Taxman 403 (Calcutta)/[2022] 446 ITR 56 (Calcutta) has laid down that where there is data showing an unreasonable rise in the prices of shares ITO vs. Sureshkumar Bhikalal Thakker Asst.Year –2015-16 - 5– of penny stock companies over a short period, the genuineness of such a rise must be established by the assessee, and in the absence of satisfactory explanation, the Assessing Officer is bound to invoke section 68. The Court further observed that genuineness cannot be established merely through bank statements, contract notes, or demat accounts when the factual matrix and conduct of the assessee defy human probability. Applying this ratio, the onus that lay upon the assessee in the present case has not been discharged. Similarly, in Principal Commissioner of Income-tax v. Smt. Usha Devi Modi [2023] 151 taxmann.com 119 (Calcutta), the Hon’ble High Court upheld the Revenue’s action in treating gains on sale of penny stock shares as unexplained income under section 68 where the assessee failed to establish the identity and creditworthiness of counterparties and could not substantiate the genuineness of steep price rise in shares of a company with no commercial worth. The ratio of this judgment squarely applies to the present case, as the assessee has completely failed to demonstrate the bona fides of the impugned transactions or to explain the rationale of investment in Safal Herbs Ltd.

The Counsel for the assessee reiterated that the transactions were genuine and supported by regular documentation, and that there was no material to indicate any direct nexus between the assessee and the alleged entry operators or any exchange of unaccounted cash. However, this line of argument is not sustainable. In such cases of penny stock manipulation, it is practically impossible for the Department to trace or establish direct evidence of the assessee’s personal involvement in the manipulation or exchange of cash with entry operators. These transactions are systematically structured and layered through multiple intermediaries ITO vs. Sureshkumar Bhikalal Thakker Asst.Year –2015-16 - 6– precisely to conceal the trail of money and participation. The absence of direct evidence, therefore, cannot by itself disprove the finding that the transaction is bogus when the surrounding facts and conduct of the assessee defy commercial logic and human probability.

The Hon’ble Supreme Court in Suman Poddar v. Income-tax Officer [2019] 112 taxmann.com 330 (SC)/[2020] 268 Taxman 320 (SC) dismissed the SLP against the findings of the Delhi High Court and ITAT that share transactions involving penny stock companies were bogus and that the purported long-term capital gains were to be treated as unexplained income. The Hon’ble Apex Court thereby affirmed that findings based on appreciation of evidence and human probabilities in such cases are pure findings of fact that require no interference.

The above legal principles have been consistently followed by various judicial authorities, including Kaushik Chandravadan Parikh v. ACIT [2025] 172 taxmann.com 694 (Mumbai - Trib.), Income-tax Officer v. Neetaben Snehalkumar Patel [2024] 167 taxmann.com 660 (Ahmedabad - Trib.), Shailesh K. Patel (HUF) v. ITO [2024] 164 taxmann.com 669 (Ahmedabad - Trib.), and Smt. Paramadevi Tekriwal v. ITO [2025] 172 taxmann.com 430 (Ahmedabad - Trib.), wherein it has been categorically held that long-term capital gains arising from manipulated penny stock transactions, supported only by paper documentation, cannot be treated as genuine.

We note that the assessee contended that the transactions were genuine and duly supported by documentary evidence such as demat statements, contract notes, and bank records. The assessee also placed reliance on judicial ITO vs. Sureshkumar Bhikalal Thakker Asst.Year –2015-16 - 7– precedents where similar additions were deleted. However, it is well-settled law that judicial precedents are to be applied in the context of their specific facts and circumstances. Each case must rest upon its own factual matrix, and no decision can be treated as a binding precedent for a proposition divorced from the context in which it was rendered. The Hon’ble Supreme Court in Commissioner of Income-tax v. Sun Engineering Works (P.) Ltd. [1992] 64 Taxman 442 (SC)/[1992] 198 ITR 297 (SC)/[1992] 107 CTR 209 (SC) has clearly laid down that “it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration, and treat it to be the complete law declared by the Court.” The Court further observed that “a judgment must be read as a whole, and the true ratio must be understood in light of the questions that were before the Court; a decision takes its colour from the facts of the case in which it was rendered.”

The principle enunciated by the Hon’ble Supreme Court in Sumati Dayal v. CIT [1995] 214 ITR 801 (SC) is also squarely applicable here, wherein it was held that the test of human probabilities and surrounding circumstances must prevail over mere documentary evidence while determining genuineness of income transactions. The pattern of conduct of the assessee in the instant case, the absence of commercial rationale, and the artificially inflated share prices of Safal Herbs Ltd. clearly demonstrate that the entire transaction was a premeditated arrangement to obtain tax exemption on fictitious gains.

In light of the above discussion and the judicial precedents cited, we find no infirmity in the order of the Assessing Officer treating the alleged long-term capital gains as unexplained income. The CIT(Appeals) erred in granting relief without properly appreciating the factual matrix and settled legal principles. Accordingly, the order of the CIT(Appeals) is set aside, and the addition made by the Assessing Officer is upheld.

In the result, the appeal of the Department is allowed. This Order pronounced in Open Court on 06/11/2025