MANISH DEVENDRAKUMAR SHAH,AHMEDABAD vs. THE ITO, WARD-5(3)(1), AHMEDABAD

6.1. The AR pointed out that in the said reply the assessee further stated that stock prices in the secondary market do not necessarily depend on EPS or business health but various external factors influence stock price movements, including Market speculation, Market perception, Market rumours, Buyer-seller behaviour and Greed and fear of investors. To illustrate this, the assessee cited the case of Tata Teleservices (Maharashtra) Ltd. (TTML), where despite continuous losses and declining revenue, Negative book value per share, Stock price surged from Rs.1.80 (on 01-04-2020) to Rs.291.05 (on 11-01-2022), reflecting a rise of 16,169.44% in just 22 months. Further, the assessee emphasized that there was no cash involvement in these transactions, as all payments were made through banking channels using account payee cheques and RTGS. Since there was no cash transaction, the allegation of accommodation entry had no basis. The assessee also stated, in the reply to show cause notice, that addition could not be made merely on suspicion, assumptions, or without tangible evidence. The assessee had furnished all necessary documents, including bank statements, Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 6 allotment letters, demat account details, and sales invoices. Since these documents were not disputed by the AO, there was no valid basis to invoke Section 68 of the Act.

6.2. The AR also pointed out from the order of AO that the AO has not taken into consideration very important financial parameters like Net Worth and EPS of the Company. The AR also pointed out that the increase in the following financial parameters of the Company as given in the order of AO which can be termed as Turnaround – Particulars March 2012 March 2016 Net worth (Rs. Cr) 3.07 14.53 Book Value (Rs.) 9.30 13.83 EPS (Rs.) -4.97 0.08 6.3. The AR further stated that such turnaround may also be a reason to believe that the share of the company may perform good in the stock market. The AR also placed reliance on the following judicial precedents where the relief was given to assessee in case of capital gains on account of sale of shares of Look Health Services Ltd. :

2. Ashokbhai Shankerlal Shah Vs. ITO Ward 1(2)(1), Ahmedabad – ITA No.1262/Ahd/2024. Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 7 3. ITO 1(1)(1), Mumbai Vs. Sohni Dipak Tanna – ITA No. 2245/MUM/2022. 4. Jayantilal Panachan Shah Vs. The PCIT-1, Ahmedabad – ITA No.627/Ahd/2024. 5. Rakesh Ramanlal Shah Vs. DCIT Circle 2(1)(1), Ahmedabad – Special Civil Application No. 4840 of 2022. 7. The Departmental Representative (DR), on the other hand, relied on the order of CIT(A) and stated that the CIT(A) in his order has distinguished the decision of Varun Nagijibhai Patel. The DR also pointed out that the assessee has dealt with only this share and very few shares of other companies which shows that the assessee is not a regular investor and has taken benefit the bogus share as concluded by the CIT(A).

8.1. At the outset, it is noted that the assessee has not pressed the grounds relating to the validity of reopening under Section 147 of the Act. Accordingly, those grounds are dismissed as not pressed. We now proceed to examine the merits of the addition under Section 68 of the Act in light of the documentary evidence, judicial precedents, and legal principles governing such cases. Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 8 8.2. The AO disallowed the assessee's claim of LTCG exemption under Section 10(38) and treated the sale proceeds of Rs. 1,07,92,400/- as unexplained cash credits under Section 68, citing the following reasons: - The shares of LHSL were identified as penny stocks by the Investigation Wing, allegedly used for generating accommodation entries. - The financial statements of LHSL showed negligible business activity, no substantial profits, and abnormal price fluctuations. - The price of LHSL shares increased exponentially in a short span without any corresponding financial growth in the company. - The assessee’s transactions were part of a larger scheme designed to create artificial LTCG claims to evade tax.

8.3. The CIT(A) upheld the addition, primarily relying on judicial precedents dealing with penny stock transactions and holding that the investment in LHSL shares was a make-believe transaction intended to launder unaccounted money.

8.4. We note that the assessee has furnished substantial documentary evidence in support of the transactions, including bank statements, demat account statements, share allotment letters, and sale invoices. The transactions were executed through recognized stock exchanges, and payments were made via banking channels. The AO has not disputed the authenticity of these documents nor produced any direct evidence to show that the transactions were manipulated or prearranged. The CIT(A), while upholding the addition, has relied on judicial precedents emphasizing the principle of human probabilities and preponderance of probabilities in tax Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 9 matters. The DR, during the course of hearing, also agreed that CIT(A)’s conclusion that - “the assessee’s investment in the shares of M/S Looks Health Services Ltd. is only a make believe transaction intended to bring back his black money into his books in a circular route through manipulation of prices of penny stock” - was not supported by evidence. This admission significantly weakens the revenue’s case, as it highlights that the addition made by the AO and upheld by CIT(A) was based solely on suspicion and general assumptions rather than on concrete material evidence.

8.5. The primary contention of the assessee is that the shares were acquired through preferential allotment from the company itself and not through off- market transactions, thereby ruling out the possibility of price rigging by the assessee. The shares were subject to a mandatory lock-in period, further reinforcing the claim that the transaction was genuine. The assessee has demonstrated that all payments were made through banking channels, thereby eliminating any possibility of cash involvement or accommodation entries. Many courts have categorically held that once an assessee furnishes documentary proof, the burden shifts to the department to rebut the evidence with substantive material. In the present case, the AO has failed to bring any cogent evidence that the assessee’s transactions were non-genuine or/and the assessee was having any role in price manipulation.

8.6. The AO has solely relied on abnormal stock price movements to conclude that the transactions were prearranged. However, as rightly argued by the AR, stock prices are subject to market speculation, investor sentiment, and external factors beyond financial performance. To substantiate this, the assessee cited Tata Teleservices (Maharashtra) Ltd. (TTML), where despite Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 10 continuous losses and a negative book value, the stock price rose by 16,169.44% in just 22 months. This is a valid example illustrating that share price fluctuations alone cannot be a ground to treat transactions as bogus. Furthermore, the financial turnaround of LHSL, as evidenced from the AO’s own findings, shows an increase in net worth, book value, and EPS, which indicates that the company had improving financial fundamentals. The AO failed to appreciate these positive indicators, which weakens the conclusion that LHSL was a penny stock with no intrinsic value.

8.7. The assessee has relied on multiple judicial precedents where similar additions were deleted by various ITATs and High Courts. In the case of Varun Nagjibhai Patel Vs. DCIT, ITAT Ahmedabad – the Co-ordinate Bench held that merely relying on Investigation Wing reports without conducting an independent inquiry was not a valid ground to make an addition under Section 68. The ruling emphasized that if the assessee furnishes valid documentation, the burden shifts to the department to disprove the claim, which was not discharged in this case. This decision directly supports the assessee’s case, as the AO has failed to provide independent evidence to rebut the transaction.

8.8. Similarly, in Rakesh Ramanlal Shah Vs. DCIT, Gujarat High Court – Special Civil Application No. 4840 of 2022, the Hon’ble Gujarat High Court ruled that if shares were acquired through legitimate preferential allotment and later sold through recognized exchanges with Securities Transaction Tax (STT) paid, the gains could not be treated as bogus. This judgment applies directly to the present case since the shares were allotted directly by the Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 11 company and subsequently traded through stock exchanges, reinforcing the assessee’s claim of a genuine transaction.

8.9. In the case of Jayantilal Panachan Shah Vs. PCIT, ITAT Ahmedabad – the Co-ordinate Bench held that stock price movements alone could not be a ground to hold transactions as accommodation entries. The department was required to establish a direct nexus between the assessee and the alleged price manipulation, which was absent in this case. This decision is directly applicable to the present case, as the AO has not shown any link between the assessee and any alleged price rigging or artificial trading activity.

8.10. Further, in the case of Sohni Dipak Tanna Vs. ITO, ITAT Mumbai – the Tribunal held that merely because a stock is flagged as a penny stock does not automatically render every transaction in that stock non-genuine. The AO must establish that the assessee was involved in the price rigging scheme, which was not proven in the case at hand. This precedent further strengthens the assessee’s position, as the AO has failed to provide any substantive evidence linking the assessee to any artificial price manipulation or accommodation entry.

8.11. The CIT(A), while upholding the addition made by the AO under Section 68, has placed heavy reliance on the decision of the Hon’ble Calcutta High Court in the case of PCIT vs. Swati Bajaj & Ors. (2022) 446 ITR 56 (Cal). However, upon careful analysis, we find that the facts of the present case are significantly different from those in Swati Bajaj, and therefore, the said decision cannot be applied as a blanket precedent. The modus operandi Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 12 involved in the case of Swati Bajaj was based on an extensive investigation report by the Directorate of Income Tax (Investigation), which provided detailed findings of price rigging and artificial inflation of share prices. The investigation established a cash trail linking the beneficiaries with entry providers, thus demonstrating the circular nature of the transactions. The shares in question were found to be thinly traded penny stocks with little or no intrinsic value, and there was evidence of pre-arranged transactions between known entities. The assessee had a direct nexus with the stockbrokers and entry operators, who were instrumental in manipulating the share prices to create fictitious long-term capital gains (LTCG). In the present case, the AO has not brought any direct evidence to link the assessee’s transactions with any price manipulation or accommodation entry provider. The DR has also admitted that the CIT(A)’s conclusion was not supported by any material evidence. Unlike Swati Bajaj, where the investigation traced cash deposits leading to share purchase, in the present case, all transactions were done through banking channels via account payee cheques and RTGS, and there was no cash involvement. In Swati Bajaj, shares were typically purchased through off-market transactions and then sold after price inflation. In contrast, the assessee in the present case acquired shares through direct preferential allotment from the company itself, which had a lock-in period as per SEBI regulations. This negates the possibility of price manipulation through circular trading in the initial acquisition. In Swati Bajaj, the shares were traded in a manner that followed a "bell curve" pattern, where prices were artificially rigged before being offloaded at a peak. In the present case, the assessee’s transactions took place through the recognized stock exchange, with STT paid, and there is no evidence that the prices were manipulated before sale. The AR has pointed out that Looks Health Services Ltd. (LHSL) Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 13 was not merely a paper company; instead, its financials showed significant growth in net worth and EPS over the relevant period. The financial turnaround was ignored by the AO and CIT(A), whereas in Swati Bajaj, the companies involved had no genuine business activity. In Swati Bajaj, the AO relied on detailed statements from entry operators, brokers, and promoters, confirming the manipulation of stock prices. In contrast, in the present case, the assessee was not provided with the investigation report or given an opportunity for cross-examination of any such statements, violating principles of natural justice.

8.12. The CIT(A) attempted to distinguish the case of Varun Nagjibhai Patel (supra) from the present case by arguing that the decision in Varun Patel was rendered in a case where the AO had not conducted a proper inquiry. The CIT(A) contended that in the present case, the AO had conducted sufficient inquiries and relied on the findings of the Investigation Wing. This distinction is incorrect as in Varun Nagjibhai Patel, the co-ordinate bench deleted the addition under Section 68, holding that merely relying on the Investigation Wing’s report without an independent inquiry was insufficient to make an addition. Similarly, in the present case, the AO has not conducted any independent inquiry beyond citing generic investigation reports, without bringing any assessee-specific evidence. The AO has failed to establish any nexus between the assessee and the alleged price manipulation, which was also the key reason why the addition was deleted in Varun Patel.

8.13. Accordingly, the CIT(A)’s reliance on Swati Bajaj is misplaced, and the distinction drawn regarding Varun Nagjibhai Patel is flawed. The assessee’s Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 14 case is supported by multiple ITAT and High Court decisions where such additions were deleted for lack of conclusive evidence.

8.14. The issue of penny stock transactions and their taxability under section 68 of the Act requires a comprehensive and well-founded approach. The mere fact that a stock has exhibited significant price fluctuations or has been categorized as a penny stock does not by itself, render transactions in such shares non-genuine. The stock market operates under a regulatory framework where shares, irrespective of their financial fundamentals, are allowed to be traded on stock exchanges. Once such share is permitted to be listed and traded, any investor or trader – whether a regular market participant or a one-time investor- is free to take advantage of price movements and seek potential profits. Price volatility in shares can arise due to various market forces, including speculative trading, demand supply dynamics, market sentiments and external economic factors. The mere fact that a share has witnessed unusual price movements does not automatically lead to the conclusion that all transactions in that share are sham or that an assessee’s trading activities lack genuineness. However, in cases where there is an allegation of share price manipulation, the AO must conduct a detailed investigation to establish whether the assessee was merely an investor availing market opportunities or an active participant in a scheme of manipulation designed to launder unaccounted income. The investigation must go beyond analyzing share price patterns and financial statements of the concerned company and should establish a direct link between the assessee’s transactions and an alleged larger scheme of price rigging. If the revenue seeks to treat a transaction bogus, it must be supported by concrete evidence that the purchase or sale of share was a sham. This would require Manish Devendrakumar Shah vs. ITO Asst. Year : 2014-15 15 proving that the transaction lacked actual transfer of ownership, that the contract notes, Demat entries were mere paper transactions, or that the corresponding money flow was circular in nature, involving accommodation entries. Additionally, if the sale or purchase is alleged to be non-genuine, the revenue must demonstrate that the entire money trail, from the purchase to the final realization of sale proceeds, was a façade used to introduce unaccounted income. It is settled principle of law that the primary onus lies on the assessee to substantiate the genuineness of the transaction by furnishing documentary evidence. If the fundamental aspects are satisfied, the burden then shifts to the revenue to bring on record specific material evidence proving that the transactions were merely a colourable device aimed at tax evasion. The mere fact that a share has been subject to price manipulation does not automatically lead to addition under section 68 of the act unless it is conclusively demonstrated that the assessee was part of the scheme, and the transactions were structured to generate artificial gains or losses. In the present case such detailed investigation by AO is absent.

8.15. Considering the discussion hereinabove, the assessee’s grounds challenging the addition of Rs.1,07,92,400/- under Section 68 on account of bogus LTCG and penny stock transactions (Grounds 1.1, 3.1, 3.2, and 3.3) are allowed. Accordingly, the addition of Rs.1,07,92,400/- under Section 68 of the Act is deleted.