INCOME TAX OFFICER, JAIPUR vs. KALAWATI SHARMA, JAIPUR

Ground No.1- Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 95,11,750/-made by AO on ITO vs. Kalawati Sharma account of bogus LTCG claimed u/s. 10(38) of the I.T. Act ignoring that the impugned transaction was manipulative/deceptive device to create profit/loss?

Ground No. 2 - Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) is justified in deleting the addition of Rs. 1, 90,235/-made by AO on account of commission paid for acquiring accommodation entry ignoring that such type of synchronized trading is violative of transparent norms of trading in securities?

The brief facts of the case are that assessee filed return of income on 27.07.2014 declaring income of Rs.6,38,840/- after claiming exemption of Rs.95,11,750/- u/s 10(38) of IT Act, 1961 on account of sale of shares of Mishka Finance & Trading Ltd (MFTL). The AO observed that searches have been conducted by the Investigation Wing of the Department at various places throughout the country. During the searches & as per the information made public by the SEBI, it is discovered that various syndicates have arranged accommodation entry of bogus LTCG, bogus STCG, bogus long/ short term capital loss through trading of shares of penny stocks. The modus operandi found is that the investors/beneficiaries hold these shares for one year or so & then sale it to one of the shell private limited companies of the operator. These facts were confirmed by the stakeholders viz. operators/ syndicate members/ brokers who were providing accommodation entries in statements recorded during action u/s 133A/132 of the IT Act. It has been manifestly accepted by them that such penny stock companies are the conduit for converting untaxed money brought on record by paying no taxes in the garb of exempted income. It is further detected that M/s Mishka Finance & Trading Ltd. (scrip code-512191) is a penny stock listed company. The assessee bought these shares at a meagre price. The price of the shares kept rising throughout the period when the shares were held by the assessee. The share price movement & the profit earned by the beneficiaries 26 to 46, he referred to the statement of Sh. Sanjay Vora & Sh. Deepak Patwari recorded during survey operation carried out in case of M/s Anand Rathi Shares & Stock Brokers Ltd. Kolkata wherein they accepted the actual fact of these transactions. Thereafter on pages 47 to 49 he discussed the modus operandi. The AO further observed at Pg 49 to 51 that SEBI has suspended this particular scrip from trading in BSE/NSE w.e.f. 17.04.2015. Accordingly, he issued show cause notice dt. 20.11.2017 which is reproduced at page 51 to 55 of the order. In response to the same assessee filed the reply dt. 27.11.2017 which is reproduced at page 55-56 of the order. 3. The AO, however, rejected the various contentions of assessee for the reasons stated at pages 56-57 of the order and relied on various case laws reproduced at Pg 57 to 62 of the order. Accordingly, he treated capital gain of Rs.95, 11,750/- on sale of shares as her income. The AO further observed that assessee has paid commission @ 2% of the capital gain introduced on sale of shares of M/s MFTL. and accordingly made addition of Rs.1,90,235/- u/s 69C of the Act. 4. The Ld. CIT (A), NFAC after reproducing the submission of assessee at Pg 10-11 of the order, at Para 4-4.2, Pg 11 considering the order of Ld. CIT (A) for AY 2015-16 where the same addition made was deleted and the departmental appeal there against to ITAT and Hon’ble Rajasthan High Court was dismissed, deleted the addition made by AO. 5. The Ld. DR vehemently argued that the financial statement of M/s MFTL does not support its share price. Reliance was placed on the decision of ITAT, Mumbai Bench in case of Shri Hitendra C. Ghadia and others in ITA No. 621,619 and 167 dt.20.03.2023, and the various orders of SEBI and SAT where the penalty imposed on M/s MFTL and 6 other entities for violating the listing agreement by SEBI has been confirmed by SAT. It was further argued that decision of Hon’ble ITAT in assessee’s own case is not applicable as the addition has been deleted on the finding that statement of 3rd party cannot be sole basis of addition. Accordingly, the Ld. DR claimed that the long term capital gain declared by the assessee which is claimed exempt u/s 10(38) of the Act is bogus and therefore, the order of CIT (A), NFAC be reversed and the order passed by the AO be confirmed. 6. The Ld. AR and the other hand argued that transaction of the assessee in M/s MFTL are genuine transactions. These transactions has been examined in AY 2015-16 where the addition made was deleted by CIT (A). The order of CIT (A) is confirmed by Hon’ble ITAT vide order dt.18.11.2010 and the department appeal against the said order was dismissed by Hon’ble Rajasthan High Court vide order dt.17.05.2022. It was also argued that in case of Prakash Chand Sharma H/o the assessee, the similar claim of exemption u/s 10(38) on the shares of M/s MFTL has been accepted by the AO in order passed u/s 147 dt.29.04.2024 after relying on the decision of Hon’ble ITAT and Hon’ble High Court of Rajasthan in AY 2015- 2016. It is thus prayed that the order of CIT (A), NFAC be upheld by dismissing the ground of the department. 7. We have perused that material available on record and also given our thoughtful consideration to the arguments of the counsel of the department and the counsel of the AR. We find that long term capital gain declared by the assessee on sale of shares of M/s MFTL in AY 2015-16 was considered as genuine by Hon’ble ITAT by approving the order of Ld. CIT(A) after giving following finding at para 32 & 33 of its order dt.18.11.2020 which is reproduced as under: - 32. In the aforesaid decision, it has been held that where SEBI who monitors and regulates the stock exchanges & stock market in its investigation did not reveal any price or volume manipulation by the assessee and these transactions are in the normal course through proper & legal channels, then the allegations of the IT Department fall flat and denial of deduction u/s 10(38) of the Act is arbitrary and addition of sale proceeds of shares of PAL u/s 68 is against the provisions of Act. In the case in hand, the AO made a reference to the SEBI interim order dated 17.04.2015 wherein the company, its promoters/directors and shareholders including the assessee were restricted from accessing the securities market, however, we find that in the subsequent order dated 5.10.2017, the SEBI has noted that there are no adverse findings against 104 entities including the assessee with respect to their role in the price manipulation/prima facie violation for which interim order was passed and therefore, directions issued against them were revoked. Therefore, the SEBI order shall have no bearing in judging the genuineness of the transaction undertaken by the assessee or for that matter, the price and realization on sale of shares so undertaken by the assessee through the stock exchange. Further, it has been held in the aforesaid case that the findings of investigation & modus operandi in other cases narrated by the AO and also CIT(A) nowhere prove any connection with the assessee nor the assessee's involvement or connection or collusion with the brokers, exit providers, accommodation providers or companies or directions etc and for making the addition, it is necessary to bring on record evidence to establish ingenuity in transactions or any connection of the assessee or its transaction with any of the alleged parties. In the instant case as well, as we have discussed earlier, there is no finding which proves assessee’s connection, involvement or collusion with so called accommodation entry providers. Further in the aforesaid case, the issue as to whether the legal evidence produced by the assessee has to guide our decision in the matter or the general observations based on statements, probabilities, human behavior and discovery of the modus operandi adopted in earning alleged bogus LTCG and STCG, that have surfaced during investigations, should guide the authorities in arriving at a conclusion as to whether the claim is genuine or not has been discussed at length. And referring to legal proposition laid down by the Hon’ble Supreme Court that the burden of proving a transaction to ITO vs. Kalawati Sharma be bogus has to be strictly discharged by adducing legal evidence held that the modus operandi, generalisation, preponderance of human probabilities cannot be the only basis for rejecting the claim of the assessee unless specific evidence is brought on record to controvert the validity and correctness of the documentary evidences produced, the same cannot be rejected. We are in agreement with the said view and in the instant case, we find that evidence produced by the assessee in support of his claim of purchase and sale of shares on the stock exchange have not been refuted by any adverse findings or material which could demonstrate involvement of the assessee or collusion with so called accommodation entry providers to obtain bogus LTCG as so alleged by the authorities below.

In light of above discussions and in the entirety of facts and circumstances of the case, we are of the considered view that the assessee has discharged the necessary onus cast on him in terms of claim of exemption of long term capital gains u/s 10(38) of the Act by establishing the genuineness of transaction of purchase and sale of shares and satisfying the requisite conditions specified therein and the gains so arising on sale of shares therefore has been rightly claimed as exempt u/s 10(38) of the Act. Accordingly, in the facts and circumstances of the case, we do not find any error or illegality in the impugned order of the ld. CIT(Appeals) who has rightly allowed the said claim of the assessee and the same is hereby affirmed. In the result, the grounds of appeal so taken by the Revenue are dismissed.

Against this order of Hon’ble ITAT, department filed appeal before Hon’ble Rajasthan High Court who vide order dt.17.05.2022 dismissed the appeal of revenue by giving following finding:-

We have also noted that SEBI has conducted an examination into the dealings in the scrip of MFTL on the BSE Limited during the period from February 14, 2013 to December 31, 2014 as there was huge rise in the price of the scrip. After preliminary examination SEBI passed an interim ex-parte order dated April 17th, 2015 and restrained 129 entities including MFTL and its promoters and directors from accessing the securities market and further prohibited them from buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever, till further directions. Subsequently SEBI vide order dt.05.10.2017 after detailed enquiries found that there is no adverse material against 104 entities mentioned at S. No. 1-104 in Table No.2 of order with respect ITO vs. Kalawati Sharma to their role in the price manipulation / prima facie violations for which Interim Order dt. April 17, 2015 was passed and thus revoked the restrained order with reference to these entities. At Table No.2, Page No.6 of the order, the name of the assessee is appearing at S. No.27. This proves that the assessee is a genuine investor in the script of MFTL.

We also find that Shri Prakash Chand Sharma, husband of the assessee, also claimed exemption u/s 10(38) of the Act of Rs.1,02,55,809/- in AY 2014-15 on sale of shares of MFTL. This case was reopened u/s 148 of the Act. The AO after considering the decision of Hon’ble ITAT and of Hon’ble Rajasthan High Court in AY 2015-16, where similar addition made by AO was deleted, held that the long term capital gain declared during the AY 2014-15 is genuine and thus accepted the long term capital gain declared by him. The facts is the project is exactly the same as in case of Prakash Chand Sharma and therefore we have no hesitation to hold that the long term capital gain declared by the assessee is genuine and therefore the grounds raised by the department do not survive.

In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 15th day of October 2025. (Dr. S. SEETHALAKSHMI) ACCOUNTANT MEMBER Jaipur, िदनांक/Dated: 15/10/2025