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Facts
The assessee claimed long-term capital gains of Rs. 1,39,81,850/- under Section 10(38) on sale of shares of M/s Jackson Investments Ltd. The Assessing Officer (AO) treated this as a 'penny stock' transaction, alleging it was arranged through accommodation entries and manipulation, and made an addition. The CIT(A) upheld the AO's order.
Held
The Tribunal held that while the assessee has a greater onus to prove the genuineness of the investment in a 'penny stock' script identified for manipulation, the assessee was not given an adequate opportunity to cross-examine the key witness, Sh. Arun Kumar Khemka. Therefore, the matter was remanded back to the AO for a de novo assessment.
Key Issues
Whether the long-term capital gains claimed on 'penny stock' transactions are genuine when the assessee was not provided an opportunity to cross-examine the source of information against them? Whether the onus on the assessee to prove genuineness is discharged when a key statement used against them was not subject to cross-examination?
Sections Cited
10(38), 143(3), 68, 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, LUCKNOW ‘B’ BENCH, LUCKNOW
Before: SH. SUDHANSHU SRIVASTAVA & SH. NIKHIL CHOUDHARY
A.Y. 2015-16 Swatantra Kumar Shukla, vs. Dy. CIT-3, Kanpur 61/139, Sita Ram Mohal, Kanpur- 208001 (U.P.) PAN: ACAPS5484N (Appellant) (Respondent) Assessee by: Sh. P.K. Kapoor, C.A. Revenue by: Sh. R.R.N. Shukla, Addl CIT DR Date of hearing: 03.09.2025 Date of pronouncement: 24.11.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: This is an appeal filed by the assessee against the orders of the ld. CIT(A)- 1, Kanpur, passed on 29.07.2019 wherein the appeal of the assessee against the orders passed by the Assessing Officer under section 143(3) of the Act for the A.Y. 2015-16 on 29.12.2017 has been dismissed. The grounds of appeal are as under: -
1. That the Ld CIT(A) was wrong in confirming the addition of Rs. 1,39,81,850- made by the AO without any valid reason.
2. That the Revenue was wrong in disallowing the claim of Long Term Capital gains u/s 10(38) of the Act and the same is against facts and law.
3. That the various case law cited by the Revenue in rejecting the claim is wrong in as much as the facts of the appellant's case are distinguishable from the cited case law.
4. That the Revenue was wrong in invoking section 68 of the Act and the same is not justified and unwarranted.
5. That it was wrong on the part of Revenue to invoke section 68 of the Act in as much as initial onus on the assessee to establish identity, credit capacity of the creditor and genuineness of the transaction was discharged.
6. That the finding of the Ld AO that 'Long Term Capital Gains of Rs.1 39,81,850/ claimed by the Assessee is held to have been arranged by the Assessee through Shri Swatantra Kumar Shukla A.Y. 2015-16 accommodation entries' is based on presumption and without any cogent evidence in support thereof.
7. That the Revenue was wrong to conclude that due to astrominical increase in share price without any economic or financial prudence show that share price of the alleged Companies are rigged, manipulated and therefore comes within the definition of 'penny stock.' 8. That the Revenue committed wrong in not permitting the assessee to cross examine the so-called share brokers, operators, promoters and exit providers which were allegedly shown and confronted to the assessee and therefore, adverse inference drawn by the Revenue was wrong and against principles of natural justice.
That the Ld CIT(A) was wrong in not considering the specific ground raised
before him stating that the Ld AO had erred in doubting the transaction by relying on the statement of the broker given in the absence of the assessee in some other case and on the grounds of non availability of details of the Company and the manner in which shares sold have been transferred in the name of the Assessee.
10. The Ld CIT(A) was also wrong in ignoring the fact that the AO had erred in not appreciating that the assessee is not at all concerned with the evidence and other material relied upon by the AO and yet taking adverse view in the case could not be taken on those grounds when the transaction was genuine.
11. That the appellant craves leave to add/amend or delete grounds of appeal during the course of appellate proceedings.”
The facts of the case are that the assessee filed a return on 30.09.2015 for the A.Y. 2015-16 declaring total income of Rs. 36,76,850/-. In the said return, the assessee had claimed long term capital gain of Rs. 1,39,81,850/- as exempt income under section 10(38) of the Act. The case was taken up for scrutiny for scrutinizing suspicious long term capital gain on shares on the basis of inputs received from the Investigation Wing. The ld. AO noted that the assessee had obtained long term capital gain on sale of share of M/s Jackson Investments Ltd. The assessee had purchased 1,13,000 shares of Jackson Investments Ltd on 10.10.2011 @ Rs. 10/- and sold 49,000 shares during the year under scrutiny for a sale consideration of Rs. 1,49,81,417/-. As a result of this transaction, the assessee had obtained long term capital gain of Rs. 1,39,81,850/- on which he had claimed exempt income under section 10(38). The ld. AO noted that the assessee was experienced in the share market and had invested in shares of many reputed companies among which were M/s Tech Mahindra, Reliance Industries, Reliance Infrastructure, State Bank Shri Swatantra Kumar Shukla A.Y. 2015-16 of India etc,. During the assessment year in question, the assessee had made investments in those companies but he had also made investment in the purchase of shares of M/s Jackson Investments Ltd, on 10.10.2011. He analyzed the financial statement of M/s Jackson Investments Ltd., and came to the conclusion that it was only a paper company that did not have any real business on the ground. It had no prospects of growth or any future plan. The ld. AO concluded that the assessee had invested his hard-earned money of Rs. 11,30,000/- in the shares of a paper company that had no prospects of growth inspite of his long experience in the share market, which was completely against logic and reason. The ld. AO also noted that the Investigation Wing of the Income Tax Department had informed that various scripts including M/s Jackson Investments Ltd., had been used for providing accommodation entries of capital gain through various entry providers. The detailed modus operandi of how such long term capital gains were obtained through penny stocks was outlined by the Assessing Officer. He further pointed out that statement of various share brokers and entry providers that had been recorded under section 131 by the DDIT (Inv.), Kolkata, had revealed that the script of, ‘Jackson Investments Ltd.,’ had been used to provide such accommodation entries. Specific reference was made to the statement of an entry operator Sh. Arun Kumar Khemka, who had admitted to controlling and managing various paper companies including Jackson Investments Ltd., and pointed out that no business activities were actually carried out by this company. The ld. AO also obtained a list of buyers of the shares sold by the assessee and observed that they were persons of no means. In response the assessee submitted that all the sales transactions had been executed through a SEBI registered stock broker, executed online at prevailing market prices, after payment of STT on all transactions and that the assessee had received contract notes, bills, ledger accounts and actual delivery of shares in demat form through the assessee’s demat account. It was further submitted that consideration for sale of shares had been received by way of cheque / RTGS and even the payment for purchase of shares had been made through banking channels. Therefore, it was submitted that the capital gain Shri Swatantra Kumar Shukla A.Y. 2015-16 transaction undertaken by the assessee was bona fide, genuine and complied all the conditions for the claim of section 10(38) of the Income Tax Act. However, the ld. AO was not convinced with the reply of the assessee. He pointed out that the shares traded were that of a Penny Stock company; there was no reason for any genuine investor for investing money in this company, the undue hike in the value of the Penny Stock of M/s Jackson Investments Ltd., was abrupt, unrealistic and not based on any realistic parameters; perusal of the buyer lists reveals that most of the buyers were Kolkata based companies that had insignificant income / work as per the data available on the website of Ministry of Corporate Affairs hence they could not be said to be genuine investors. Furthermore, the entry provider, Sh. Arun Kumar Khemka, had in a statement dated 24.02.2015 confessed that many stocks including M/s Jackson Investments Ltd., were being used by his brokerage house for providing accommodation entries in the form of long term capital gains. The assessee had failed to appear before the AO and justified his share transactions. Therefore, the ld. AO placed reliance on the judgment of the Hon’ble Supreme Court in the case of Sumati Dayal vs. CIT 214 ITR 801, CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC), McDowell & Co. Ltd. vs. CTO 154 ITR 148 (SC) and various judgment of the ITAT to reject the claim of long term capital gains, holding them to be bogus. While doing so, he also discussed the movement of the script of M/s Jackson Investments Ltd., and raised question marks on the votality displayed in its price. Accordingly, he made an addition of Rs. 1,39,81,850/- on this account and initiated penalty proceedings under section 271(1)(c).
Aggrieved with the said addition, the assessee went in appeal to the ld. CIT(A)-1, Kanpur. It was submitted that the transactions of shares were supported by contract notes issued by the brokers and hence the assessee had correctly claimed the exemption under section 10(38) of the Act. Various case laws were cited by the assessee in his favour and the assessee also objected to the framing of the assessment order without affording him an opportunity to cross examine the key witness. The ld. CIT(A) considered the submissions made by the assessee. He Shri Swatantra Kumar Shukla A.Y. 2015-16 observed the abnormal movement in the share prices of M/s Jackson Investments Ltd; the fact that the company were not carrying out any genuine business activities and that it did not possess any fixed assets, to conclude that the increase in share prices without any economic or financial reasons showed that the share price of the said company was rigged, manipulated and therefore non-genuine. He noted that the assessee had not filed documentary evidences to substantiate the purchase of shares, the Investigation Wing of Kolkata had carried out investigation into scripts of Penny Stock companies and discovered that M/s Jackson Investments Ltd, was a Penny Stock; Sh. Arun Kumar Khemka, an Entry Operator, had confessed that M/s Jackson Investments Ltd was used for providing accommodation entries in the form of LTCG and that no business operations were conducted in the said company; the ld. AO had specifically analyzed the price movement of these shares and contrasted it with the basic fundamentals of the company’s balance-sheet or business activities to demonstrate that the higher quoted price of the Penny Stocks was a result of the rigging of script through circular trading without any intrinsic value of the shares of such Penny Stocks. Furthermore, it had been demonstrated that the persons who purchased the shares of M/s Jackson Investments Ltd; were persons of no means and did not possess the financial capacity to purchase such high value shares that had no intrinsic value. The ld. CIT(A) also observed that independent investigations by SEBI had confirmed that Penny Stocks were being used for converting black money into white. He observed that many individuals had admitted to the fact of bogus claims of LTCG, STCG and withdrawn their claims by filing revised return and such confessions strengthened the case of the Revenue. In view of all these reasons, the ld. CIT(A) held that there was no reason to interfere with the addition made by the AO and doing so, he relied upon the judgment of the Hon’ble Delhi High Court in the cases of i. M/s NDR Promoters Pvt., Ltd. vs. PCIT (ITA No. 49/2018 dated 17.01.2019) ii. PCIT (Central-1), vs. NRA Iron Steel Pvt., Ltd., SLP (Civil) No. 29855 of 2018 dated 5.03.2019 Shri Swatantra Kumar Shukla A.Y. 2015-16 iii. CIT vs. Nova Promoters & Finlease (P) Ltd. [2013] 342 ITR 169 (Delhi) iv. CIT vs. D.K. Garg [2017] 84 taxman.com 257 (Delhi) v. Mrs. Vidhya Reddy vs. ITO [2018] dated 15.05.2018 vi. ITO vs. Shamim M. Bharwani dated 27.03.2015 He also rejected the plea of the assessee for cross examination by citing the decisions of the Hon’ble Supreme Court in the case of Dhakeshwari Cotton Mills, 26 ITR 775 and Chuharmal vs. CIT, 172 ITR 250 (SC). He also placed reliance on the jurisdictional High Court in the case of Motilal Padampat Udyog Limited vs. CIT, 292 ITR 656 and the judgments of the Hon’ble Delhi High Court rendered in the case Udit Kalra vs. ITO on 4.04.2019. Thus, he came to dismiss the appeal of the assessee.
The assessee is aggrieved at the dismissal of his appeal by the ld. CIT(A) and accordingly come before us. Sh. P.K. Kapoor, C.A. (hereinafter referred to as the ld. AR) submitted that the assessee had purchased the shares in the assessment year 2012-13 and held them for three years before selling them in the assessment year 2015-16. He further submitted that the assessee was a person who was dealing regularly in shares. The ld. AR pointed out that there were four judgments rendered by the ITAT in favour of various assessees’ who were accused of bogus long term capital gains while trading in the shares of the same company namely M/s Jackson Investments Ltd,. These judgments were order dated 8.09.2023 in the case of Sanjay Madan Raj Shah vs. ACIT-32(3), Mumbai in order dated 23.08.2019 in the case of Neetu Agarwal vs. ITO, Ward-2(4), Siliguri in order dated 28.02.2019 in the case of Om Prakash Mundra & Ors vs. ITO, Ward-3(4) in and order dated 12.12.2018 in the case of M/s Anupma Garg vs. ITO, Ward-40(1), New Delhi in ITA No. 5971/DEL/2018. The ld. AR pointed out that in all these cases, sale and purchase of the shares of M/s Jackson Investments Ltd in similar circumstances had been considered by the Hon’ble Tribunal and had been held to be genuine. Therefore, in the case of the assessee, there was no reason to hold that Shri Swatantra Kumar Shukla A.Y. 2015-16 the assessee was involved in any manipulated activity. It was submitted that other persons had also invested in the company in the same pattern and no involvement of theirs in rigging had been noticed. Nor was there any evidence against the assessee in this regard. It was submitted that while some investigations had been conducted by the Investigation Wing in respect of the penny stock companies, the ld. AO had not carried out any further verification to determine whether the assessee had manipulated anything while the claiming long term capital gains. The ld. AR submitted that the assessee had not sold shares to any companies as alleged by the ld. Assessing Officer. Rather they had sold their shares on the floor of the stock exchange and were not concerned with who had purchased the said shares. It was further argued that the assessee had not been given adequate opportunity of defending itself as the statement of Sh. Arun Kumar Khemka had been used against him without affording the assessee an opportunity to cross examine Sh. Arun Kumar Khemka. Therefore, it was prayed that the assessment done by the ld. AO and confirmed by the ld. CIT(A) was bad in law.
On the other hand, Sh. R.R.N. Shukla, Sr. DR (hereinafter referred to as the ld. DR) pointed out that the investment by an assessee who was well-versed in the practices of the share market through a company which had no intrinsic value i.e. was a shell company was in itself something that was beyond realm of the ordinary. Any prudent investor only invested in shares that had potential to yield profits or dividend. As the said company was not performing any business activity, there was no reason for any prudent investor to make investment in the same with any hope of increase in the value of his investments, unless the said investor was privy to the proposed scheme of manipulation in the prices of those shares. The Investigation Wing, during the course of its investigation, had brought out the fact that the scrip of M/s Jackson Investments Ltd was being used for manipulation by certain unscrupulous brokers. Furthermore, the trading pattern of the stock, that was highlighted by the Assessing Officer in his order clearly confirmed the said investigations done by the Investigation Wing. The ld. DR pointed to the appeal Shri Swatantra Kumar Shukla A.Y. 2015-16 order passed by the ld. CIT(A) had referred to two significant judgments one by the Hon’ble Delhi High Court in the case of M/s NDR Promoters Pvt Ltd., vs. PCIT (supra) and the other by the Hon’ble Supreme Court in the case of PCIT, Central vs. NRA Iron Steel Private Limited (supra) in which the Hon’ble Courts had held that the onus was clearly upon the assessees in those cases to satisfy the AO about the genuineness of the transactions when there was evidence to indicate that the transactions entered into them was bogus. It was further pointed out that the ld. CIT(A) had made reference to several decisions of the ITAT in which credit entries received have been treated as unexplained and liable to be taxed under section 68 of the Act if the creditors were entities / persons involved in providing accommodation entries. Furthermore, it was pointed out that the Hon’ble Allahabad High Court had laid down in the case of Motilal Padampat Udyog Limited vs. CIT, 293 ITR 656 that the right of cross examination were not required under the law for a valid assessment and the requirement of a statute could be met if all the evidence that were collected which was to be used against the assessee was placed before the assessee and he was given an opportunity to rebut the evidence. It was therefore, submitted that since the necessary materials had been provided to the assessee and the assessee had failed to rebut the contention, the addition was rightly confirmed by the ld. CIT(A) and accordingly no interference was called for by the Tribunal in the said orders.
We have duly considered the facts of the case and the arguments of both parties. We are of the view that once a script has been identified to be a Penny Stock that is being used for manipulation and rigging with a view to generating bogus accommodation entries of parties, then any assessee who is investing in the said script has to discharge a greater onus than normally required, in order to exhibit that his investment in the said penny stock was a genuine investment and not one made with a view to earning astronomical profits on account of rigging of such shares. It is normal to expect that any prudent investor who would invest in share would, in order to protect his investment, look into the intrinsic value of the Shri Swatantra Kumar Shukla A.Y. 2015-16 share, the business potential, the future business plans and the overall economic to determine the feasibility of such investment, presuming that the purpose of investment was to maximize profit. Unless the assessee could show that the said investment had been made after a study of the financials of the company and the future plans, which may indicate good prospects for profit in the investment, it has to be assumed that the investment was made with a view to taking benefit of the rigging in the price of the script. In this context, the reply submitted by the assessee to the Assessing Officer contained on page 04 of the paper book filed by the ld. AR on 1.09.2025 have revealed the reason for purchasing of the script of the M/s Jackson Investments Ltd to be, “penny scripts are low price which may produce very high returns against cost of investment. Except this, there is no other specific reason for purchasing penny shares”. Furthermore, the assessee has submitted that since there was very meagre investment in penny stocks, the financial performance of these shares had not been analyzed. In the circumstances, it is apparent that the investment was made by the assessee without any analysis into the affairs of the company and only because of a hunch that it may yield very high benefits. Considering that there is an allegation that the said scripts had since been manipulated by vested interest to artificially rig the prices and generate bogus long term capital gains, if the fact of such rigging is established, there is a far greater onus on the assessee to establish his bonafides. However, we note that the allegation of rigging of these shares is made primarily on the basis of the statement of Sh. Arun Kumar Khemka, the stock broker who is alleged to have rigged the price of these shares to provide accommodation entry, but the assessee has not been given an opportunity to cross examine Sh. Arun Kumar Khemka before the inferences drawn from his statement have been used against him. The ld. CIT(A) has upheld this on account of the judgment of the jurisdictional High Court in the case of Motial Padampat Udyog Ltd. vs. CIT 292 ITR 656 and the judgment of the Hon’ble Delhi High Court in the case of Udit Kalra vs. ITO (ITA No. 220/2019 & CM No. 10774/2019). We also note that the ld. CIT(A) has also made a reference to Report of the investigation wing and a SEBI investigation that supposedly confirm Shri Swatantra Kumar Shukla A.Y. 2015-16 that the share had been used to converting black money into white. He also makes reference to other beneficiaries of the rigging scheme having withdrawn their claims of long term capital gains and filed revised return, but it is not clear as to whether the assessee has been confronted with these materials and granted opportunity to rebut the inferences drawn from them. We, therefore, deem it appropriate to report this matter back to the file of the ld. AO for providing this material and thereafter giving an opportunity of hearing to the assessee to present his arguments. While doing so, the ld. AO may also consider the orders of the ITAT passed in respect of other assessees who have dealt with the script in question, that have been filed by the assessee before us and thereafter pass a fresh order in accordance with law. Since the matter stands restored to the file of the AO for a de novo assessment, the appeal of the assessee is held to be allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced on 24.11.2025 in the Open Court.