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Facts
The assessee declared Long-Term Capital Gain (LTCG) of Rs.1,29,20,843/- from the sale of Kappac Pharma Ltd. shares, which were initially purchased off-market and later sold on the Bombay Stock Exchange. The Assessing Officer (AO) treated this LTCG as bogus under Section 68, citing characteristics of a penny stock scam, including significant price increase without financial backing and SEBI suspension of the company's trading.
Held
The CIT(A) deleted the addition, finding that the assessee provided complete documentary proof for the transactions. The ITAT upheld the CIT(A)'s decision, ruling that the AO relied solely on general observations of penny stock manipulation without establishing a direct link between the assessee and any price rigging, and that the judicial precedents cited by the Revenue were distinguishable based on facts.
Key Issues
Whether long-term capital gains from the sale of shares of a penny stock company can be treated as bogus and added under Section 68 of the Income Tax Act when the assessee provides documentary evidence for genuine transactions.
Sections Cited
68, 143(1), 143(2), 10(38), 133(6)
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Income Tax Appellate Tribunal, “ B ” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
आयकर अपीलीय अिधकरण, अहमदाबाद "ायपीठ “बी“, अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “ B ” BENCH, AHMEDABAD सु"ी सुिच"ा का"ले, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम"। ] ] BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं / Year : 2015-16 The DCIT Shri Rajendra J. Keshwani बनाम/ Central Circle-1(1) (HUF) v/s. Ahmedabad-380 009 44, Asopalav Bungalows Nr.Muktidham Jain Temple Thaltej, Ahmedabad "थायी लेखा सं./PAN: AAEHK 1973 J अपीलाथ%/ (Appellant) &' यथ%/ (Respondent) Assessee by : Shri M.K. Patel, Advocate Revenue by : Shri Kavan Limbasiya, Sr.DR सुनवाई की तारीख/Date of Hearing : 12/02/2025 घोषणा की तारीख /Date of Pronouncement: 18/02/2025 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM:
The present appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-11, Ahmedabad [hereinafter referred to as "CIT(A)"], dated 22-01-2021, for the Assessment Year (AY) 2015- 16, wherein the CIT(A) deleted the addition of Rs.1,29,20,843/- made under Section 68 of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] by the Dy. Commissioner of Income Tax, Central Circle-1(1), Ahmedabad [hereinafter referred to as "AO"]. The DCIT vs. Shri Rajendra J. Keshwani (HUF) Asst. Year : 2015-16 2 Facts of the Case:
2. The assessee filed the return of income for A.Y. 2015-16 on 24-09-2015, declaring a total income of Rs.58,42,990/-, which was processed under Section 143(1) of the Act. The case was subsequently picked up for scrutiny, and a notice under Section 143(2) of the Act was issued and duly served upon the assessee. The assessee had declared total Long-Term Capital Gain (LTCG) of Rs.1,29,20,843/- including the LTCG arising from the sale of shares of Kappac Pharma Ltd. (KPL). The assessee had purchased 53,000 shares off market from Shaswat Stockbrokers Pvt. Ltd. at the rate of Rs.20.19 per share, which were later dematerialized and sold on the Bombay Stock Exchange (BSE) through ASE Capital Markets Ltd. at the rate of Rs.253 to 257 per share. The sale consideration was received through banking channels, and STT was duly paid on the transactions.
The AO relied on various reports and investigations conducted by the Income Tax Department in Kolkata, Delhi, and Mumbai, which unearthed accommodation entry operations in penny stocks. The AO identified common features of such penny stock companies, which were present in KPL:
1. Preferential allotment or off-market purchase of shares by beneficiaries.
2. Sharp increase in stock price within a short period, without any improvement in financials. 3. Extremely low trading volume except during the price manipulation period. 4. Most investors received their capital back in cash, while only a small portion was retained. 5. No real business activity to justify the stock price increase. The DCIT vs. Shri Rajendra J. Keshwani (HUF) Asst. Year : 2015-16 3 6. Price movement was not backed by fundamentals or company performance.
3.1. The Securities and Exchange Board of India (SEBI) had taken action against various penny stock scams, including the one involving Kappac Pharma Ltd. (KPL). The AO noted the following critical facts:
BSE suspended trading in KPL shares on 01.01.2015 due to price manipulation concerns.
The suspension remained in force at the time of assessment. 3. The sale of KPL shares by the assessee was examined, and it was found that the counterparties were Affluence Commodities Pvt. Ltd. and Unipon India Ltd. (formerly Oasis Textiles Pvt. Ltd.). 4. The AO also noted that Affluence Commodities Pvt. Ltd. was involved in tax evasion schemes by booking fictitious losses, while Unipon India Ltd. was a suspended company on BSE, further indicating accommodation entries rather than genuine transactions 3.2. The AO issued a show cause notice on 06.11.2017, asking why the LTCG of Rs.1,29,20,843/- should not be treated as bogus and added to total income. In response, the assessee submitted a reply on 09.11.2017, contending that the shares were bought at market price as per the stock exchange, payment was made via account payee cheques, ensuring transparency, delivery of shares was done through Demat accounts, proving ownership. The assessee also submitted that the shares were held for more than 15 months, qualifying them as LTCG under Section 10(38) of the Act. Transactions were conducted via SEBI-registered brokers, and STT (Securities Transaction Tax) was paid. The assessee also stated that the AO relied on The DCIT vs. Shri Rajendra J. Keshwani (HUF) Asst. Year : 2015-16 4 general observations about penny stock manipulation, without any direct proof against the assessee.
3.3. The AO rejected the argument that the purchase and sale were genuine. The AO concluded that penny stock frauds operate as an ecosystem, and relying on the decision of the Coordinate Bench in ITO vs. Shamim M. Bharwani (Mumbai ITAT) [69 taxmann.com 65], treated the LTCG as bogus and added it under Section 68.
The CIT(A), after considering the assessee’s submissions and available documentary evidence, deleted the addition by observing that the assessee had provided complete documentary proof, including Purchase invoices, Demat account statements, Broker’s confirmation, Contract notes, Bank statements showing payment via account payee cheque and STT payment records. The CIT(A) also pointed out flaws in the AO’s approach, including blind reliance on third-party reports without case-specific evidence, failure to establish any link between the appellant and alleged price rigging and disregard for substantial documentary evidence supporting the genuineness of the LTCG claim.
5. Not satisfied with the order of the CIT(A), the revenue preferred an appeal before us with following grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition of Rs.1,24,19,369/- made under section 68 of the Act despite the fact that the assessee failed to prove the genuineness of the transaction?
2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has failed to appreciate that the Assessing Officer has categorically established the LTCG on sale of shares of Kappac Pharma Ltd was non-genuine and The DCIT vs. Shri Rajendra J. Keshwani (HUF) Asst. Year : 2015-16 5 there was no financial credentials to justify such a significant increase in price of shares in short period and the assessee had a windfall Long Term Capital Gain of Rs.1,24,19,369/-.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.
4. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.
This case is covered under exception as per CBDT's Circular No.23 of 2019 dated 06.09.2019 read with Office Memorandum dated 16.09.2019 vide F.No.279/Misc./M-93/2018-ITJ(Pt.).
During the course of hearing before us, the Departmental Representative (DR) argued that the assessee has failed to explain and justify the purchase and sale of shares in Kappac Pharma Ltd. (KPL). And the assessee has not explained why he invested in a penny stock company with a consistently zero turnover. The DR relied on the decision of Hon’ble Calcutta High Court in the case of PCIT vs. Swati Bajaj [2022] 139 taxmann.com 352 and decision of Co-ordinate SMC Bench in case of Atmiben Alipitkumar Doshi (ITA No. 940/Ahd/2018).
The Authorized Representative (AR) of the assessee argued that the assessee provided complete documentation to the AO and CIT(A), including Purchase and sale invoices, Bank statements showing payment via account payee cheque, Demat account statements reflecting the shares held and subsequently sold, Broker’s confirmation in response to the notice issued under Section 133(6) of the Act and the CIT(A), after examining these documents, ruled in favor of the assessee, accepting the genuineness of the transactions. The AR specifically pointed out that the AO had issued a notice The DCIT vs. Shri Rajendra J. Keshwani (HUF) Asst. Year : 2015-16 6 u/s 133(6) of the Act to the broker, who confirmed that the shares were genuinely purchased through stock exchange transactions. The AR argued that this confirmation from broker directly contradicts the Departmental Representative's argument that the purchase was not genuine. The AR placed on record the judgment of the Gujarat High Court in a similar matter, where the same shares were held to be genuine transactions. The AR also cited a decision of the co-ordinate bench in the case of Denisha Rajendra Keshwani (wife of the Karta of HUF), where Facts and circumstances were identical and the bench dismissed the Revenue’s appeal, upholding the genuineness of transactions.
We have considered the rival contentions and perused the material available on record. The assessee has provided all necessary documentary evidence to substantiate the purchase and sale of shares, including purchase agreements, Demat account statements, broker confirmations, bank transaction records, and STT payment proof. The broker, Shaswat Stockbrokers Pvt. Ltd., confirmed the transactions in response to a notice under Section 133(6) of the Act. The shares were purchased off-market but subsequently dematerialized and sold through BSE, demonstrating the transparency of the transaction.
8.1. The AO’s addition under Section 68 is not based on any direct evidence showing that the transactions were accommodation entries. The AO has relied only on general observations regarding penny stock manipulation, without establishing any link between the assessee and such activities. Mere stock price fluctuations, without direct evidence of price rigging or collusion, cannot justify an addition under Section 68 of the Act. The Hon’ble Gujarat The DCIT vs. Shri Rajendra J. Keshwani (HUF) Asst. Year : 2015-16 7 High Court, in the case(s) of Pr. CIT v. Himani M. Vakil [2014] 41 taxmann.com 425 and Pr. CIT v. Maheshchandra G. Vakil [2013] 40 taxmann.com 326, has held that mere reliance on the Investigation Wing’s report and abnormal price fluctuations cannot justify an addition under Section 68 unless there is specific material to prove that the transaction is a sham. Furthermore, the Co-ordinate bench, in the case of Denisha Rajendra Keshwani (ITA No. 39/Ahd/2021), dismissed the Revenue’s appeal in a case with identical facts, holding that the assessee had duly discharged the onus by providing all necessary documents, while the Revenue failed to rebut them with substantive material.
8.2. We also find that the judicial precedents relied upon by the DR do not apply to the present case. In case of Swati Bajaj (supra) the assessee had purchased shares off-market at a nominal price and sold them at an artificially inflated price, allegedly without any supporting financials. However, in the present case, the assessee purchased shares at a price higher than the market rate and sold them at a lower-than-peak price, indicating no price manipulation. The AO failed to establish any direct link between the assessee and entry operators or price rigging. Further, the assessee is a regular stock market investor with a history of trading activities, unlike in Swati Bajaj, where the transaction was found to be isolated and pre-arranged. Similarly, in the case of Atmiben Alipitkumar Doshi (supra), the Co-ordinate Bench treated the LTCG as bogus because the shares were purchased in cash, and the price movement was completely disproportionate to the company’s financials. In contrast, in the present case, the assessee purchased shares through banking channels, and the Demat statements and STT payment records confirm the legitimacy of transactions. The DCIT vs. Shri Rajendra J. Keshwani (HUF) Asst. Year : 2015-16 8 Additionally, the Hon’ble Gujarat High Court, in Affluence Commodities Pvt. Ltd. (R/Tax Appeal No. 264 of 2024), has held that the purchase of shares of Kappac Pharma Ltd. was genuine. The AR has rightly contended that when the purchase by the counterparty is held to be genuine, the sale by the assessee cannot be treated as bogus, unless the Revenue brings on record contrary evidence. The Revenue has not produced any evidence to demonstrate that the transaction was pre-arranged or collusive.
8.3. Considering the totality of facts, we find that the assessee has fully discharged the burden of proof by providing all necessary evidence, whereas the Revenue has failed to rebut it with substantive material. The AO has neither examined the counterparty nor produced any evidence of collusion or price manipulation. Since the judicial precedents relied upon by the DR do not apply to the present case, and following the settled legal principles laid down by the Hon’ble Jurisdictional High Court and Co-ordinate Bench in similar cases, we find no infirmity in the order of CIT(A).