HANSA JITENDRA HARIA,JAMNAGAR vs. PRINCIPAL COMMISSIONER OF INCOME TAX, JAMNAGAR

in the interest of justice”

3. Succinctly, the factual panorama of the case is that assessee before us is an Individual and had filed Return of Income, on 27/07/2013, declaring total income of Rs 3,31,950/-. The case of the assessee was reopened on the basis of information that the assessee has sold 7200 penny stock shares of GLOBAL SECURITY (scrip code 530657) worth Rs. 5,28,540/- during the FY 2012-13 and claimed long term capital gain ( in brief “LTCG”), as exempt u/s 10(38) of the Act, to the tune of Rs. 5,26,730/-, in the return of income filed by the assessee. Accordingly, the assessment in the case of the assessee was finalized vide order u/s 147 rws 144B of the Income-tax Act (for short 'the Act'), dated 30/03/2022 by accepting returned income.

5. Accordingly, a show cause notice for initiation of proceedings u/s 263 of Act dated 22/12/2023 was issued to the assessee through ITBA as well as served through registered post with a request to submit the written submissions latest by 02/01/2024 which is reproduced as under:

“Please refer to the above. 2. On perusal of the case records for the AY 2013-14, it is observed that you have filed return of income on 27/07/2013 declaring total income of Rs 3,31,950/-. Subsequently, the assessment in your case has been finalized vide

4. M/s GLOBAL SECUR is a proven penny stock company which is only used to accommodate unaccounted money in terms of LTCG. You have purchased total 7200 shares of M/s GLOBAL SECUR at the rate of 02 Rupee per shares on 19/04/2011 and sold them in the month of December 2012 on average rate of Rs. 74 per share. The share price movement in the captioned scrip was seen from public domain and observed that share price rise which is prima facie not supported by financial fundamentals of the scrip. Normally, the price manipulation is done by creating a syndicate by the promoters, brokers, managers, controllers etc. and the price of such shares is raised abnormally high to show fictitious LTCG 5. From a plain reading of the financials of M/s GLOBAL SECUR neither any historical precedence of having strong financials, nor did it has any strong foundations for future prospects. It was a predetermined action with a specific intention. This circumstantial evidence leading to the conclusion that LTCG earned by you is not genuine one. 6. In order dated 10/04/2017, the Hon'ble Bombay High Court in the case of Sanjay Bimal Chand Jain Vs Pr CIT, 89 taxmann.com 196, dismissed appeal of the assessee on the findings of the Hon'ble ITAT that the fantastic sale price was not at all possible as there was no economic or financial basis to justify the price rise and that the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain. The order is squarely applicable in the case of the assessee as the facts are quite the same. 7. In view of the above discussion, it is held that LTCG claimed as exempt u/s 10(38) of the Act by you is derived from penny stocks and it should be treated as your undisclosed income u/s 69A of the IT Act. Here, the AO during the course of assessment proceedings grossly erred in not treating sale of penny stock shares of M/s GLOBAL SECUR of Rs. 5,28,540/- as your undisclosed income u/s 69A of the Act. As such, the order passed by the AO is prima facle erroneous and prejudicial to the interest of the revenue within the meaning of the provisions of section 263 of the Act, 1961, Therefore, I intend to revise the order passed by the AO u/s 147 rws 1448 of the Act dated 30/03/2022 for the AY 2013-14. 8. Under the circumstances, you are requested to show cause as to why the order u/s 147 rws 144B of the Act dated 30/03/22 for the AY 2013-14 should not be revised u/s 263 of the Income-tax Act. You may submit your written submissions to this office either through e-proceedings module of your e-filing /AY.2013-14 Hansa Jitendra Haria vs. PCIT account on the website https://www.incometax.gov.in or e-mail to jamnagar.pcit@incometax.gov.in or by any other postal modes / personal appearance or through your authorized representative latest by 02/01/2024 at 11:00 am, failing which it may be presumed that you have no submission to make and revision order will be passed, based on the details and materials available on record.”

(i). Purchase of stock at rock bottom price generally in physical form. (ii). No Financial credibility of the company, whose shares are purchased by the Investors. (iii) Bell Pattern in share price movement i.e. once price target is achieved price falls back to minimum. (iv) No rhyme or reason for sudden spurt of share price, defying Index or similar share price movements. (v). Promoters of shares are also not from any established groups, in fact, they are of people of no means. (vi). Price escalation through synchronised trading within limited parties, mostly entities controlled by the entry operators. (vii). Statement recorded during search or survey operations conducted by the investigation wing clearly established the facts that price of the shares is manipulated with the sole aim of providing bogus Capital Gain or Loss,

(i) The SEBI as well as Investigation Wing of the Income-tax department has already confirmed that transactions made in sale of shares of penny stock are bogus and used the same for generation of bogus LTCG which are in turn claimed as exempted in return of income filed. (ii) The AO has to verify the mode of transactions (Physical/ online through stock exchange) made by the assessee at the time of purchase and sale of shares of Global Secur. (iii) Dematerialization of the share purchased by the assessee. (iv) Debit and credit of shares in the Demat account of the assessee with reference to date of purchase and sale made. (v) The AO has to verify about the fact that whether the assessee is a regular investor in shares or not.

However, the AO has failed to examine various aspects of penny stock cases as per the SOP issued by CBDT to decide any LTCG as bogus capital gain through penny stock even though the modus operandi adopted by the assessee matches with modus operandi mentioned in the said SOP.

"9. The entire amount of the so called receipt of share sales could well also be treated as unexplained credit u/s 68 of the I.T. Act as it has all the ingredients of attracting the rigours of the said section. Section 68 of the I.T. Act provides that where any sum is found credited in the books of the assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to income tax as income of the assessee of that year. In the present case the assessee's explanation that the said receipt is on account of investment in shares whereby share of Rs.5/- of unknown company has jumped to Rs. 485/- in no time has been totally rejected by the authorities below. The assessee has not at all been able to adduce cogent evidences in this regard. There is no economic or financial justification for the sale price of these shares. The so called purchaser of these shares has not been identified despite efforts of the AO. The broker company through which shares were sold did not respond to queries in this regard. Hence the fantastic sale price realisation is not at all humanly probably, as there is no economic or financial basis that a share of little known company would jump from Rs 5 to 485 in These circumstances, I do not find any infirmity in the orders of the authorities below Accordingly I affirm the same and decide the issue against the assessee. 10 in the result, this appeal filed by the assessee stands dismissed.”

The appeal of the assessee in above referred case has already been dismissed by the Hon'ble High Court of Bombay in Sanjay Bimalchand Jain vs Principal Commissioner of Income-tax-1, Nagpur (2018) 89 taxmann.com 196 (Bombay).

6. It may be mentioned here that with effect from 01/06/2015, Explanation 2 to the section 263(1) has been inserted which reads as under- "Explanation 2.- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, (a) The order is passed without making inquiries or verification which should have been made (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119, or (d) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person, As per the above Explanation 2 of section 263 of the Act, the order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue if the order is passed without making inquiries or verification of the information available on record. In this case, the material and information was available with the AO regarding the issue as discussed above. However, the same was not considered by the AO and proper enquiry was not made before concluding the assessment and passing the assessment order u/s 147 rws 144B of the Act on 30/03/2022. In view of the above facts and on perusal of reasons recorded for reopening vis- à-vis the order passed by the AO u/s 147 rws 144B of the Act dtd 30/03/2022, it clearly appears that the AO has altogether not considered the issue under discussion and has not made any enquiries as regards the issues of penny stock. Therefore, in the facts and circumstances of the case, it clearly appears that the AO has failed to make proper enquiry/ verification while finalizing the assessment and such failure on the part of the Assessing Officer to allow the claim of the assessee u/s 10(38) of the Act of Rs.5,26,730/- has rendered the order passed by the AO u/s 147 rws 144B of the Act dtd 30/03/2022 erroneous and prejudicial to the interest of the revenue within the meaning of section 263 of the Act to that extent It is also to be mentioned that Assessing Officer is duty bound to assess the correct income of the assessee. Since this income remained to be added/disallowed, action u/s. 263 of the Act is justified.

/AY.2013-14 Hansa Jitendra Haria vs. PCIT 10.In a similar case reported in (2022) 139 taxmann.com 352 (Calcutta), Pr. Commissioner of Income tax Vs. Swati Bajaj, the Hon'ble High Court of Calcutta has upheld the jurisdiction of PCIT u/s 263 where the Assessing Officer being fully aware of the investigation which was being done in penny stock companies failed to take note of such report and make enquiry by calling upon the assessee to justify the genuineness of claim of LTCG and the reason for such abnormal rise in price of shares within a short period of time. The Hon'ble Court has observed as under:

“The assessments orders which are subject matter of Section 263 action shows that an enquiry has not been conducted by the assessing officer in the manner it ought to have been conducted. We say so because, the officers of the income tax department were fully aware of the investigation which was done and the report been circulated and therefore at that stage that the officer had to take note of such report to put the assessee on notice and commenced an enquiry by calling upon the assessee to justify the genuineness of the claim of LTCG/STCL. The assessing officer turned a blind eye to the project investigation which was carried out by the department. The assessing officer lost sight of the fact that the enquiry did not commence from that of the assessee and more particularly the name of the assessee did not feature in the investigation report. Therefore, the assessing officer was bound to cause an enquiry by calling upon the assessee to explain and justify the genuineness of the claim for exemption made by them. If the assesses has not established the genuinity at the "other end" the assessing officer would have no other operation except making the addition under section 68 of the Act. We find that in these cases the assessing officers missed an important point as to what is the nature of enquiry which he is required to do. The assessing officer merely went by the submission that the stock broker is a public sector company. Unfortunately, this is not the manner in which the enquiry should have been conducted. The entire case before the department was the genuinity of the claim for LTCG/STCL and the basis was unhealthy and steep rise of the price of the shares of mostly the paper companies though listed before the stock exchanges their shares were very rarely traded and in the background of these facts the enquiry should have been conducted by the assessing officer. Therefore, we are of the clear view that the assumption of jurisdiction under section 263 of the Act by the respective Commissioners was fully justified and are shown to be proper exercise of power. The tribunal while interfering with the orders of the Commissioner once again posed a wrong question to itself and failed to approach the matter in the proper perspective considering the backgrounds in which the power was invoked The tribunal brushed aside the surrounding circumstances which have led to such assessments or orders under section 263 The manipulative practice /AY.2013-14 Hansa Jitendra Haria vs. PCIT adopted by the stock brokers and entry operators was not even adverted to by the tribunal and the entire matter was dealt with in a very superficial manner without dwelling deep into the core of the issue. The tribunal being the last fact finding authority was required to go deeper into the issue as the matter have manifested large scale scam. Thus, the orders of the tribunal are not only perfunctory but perverse as well. The exercise that was required to be done by the tribunal is to consider the totality of the circumstances because the transactions are shown to be very complex, the meeting of minds of the "players" can never be established by direct evidence and therefore the surrounding circumstances was required to be taken note of by the tribunal which exercise has not been done."

"Assessee has sold 7200 penny stock shares of GLOBAL SECUR (Scrip code -530657) and as per AIMS module in ITS data worth Rs. 5,28,540/- during FY 2012-13 relevant to AY 2013-14. The assessee has claimed exempt LTCG to the tune of Rs 5,26,730/- in the return of income. The share price movement in the captioned scrip was seen from public domain and observed that there is share price rise which is prima facie not supported by financial fundamentals of the scrip.Thus, the assessee has availed accommodation entry to the tune of sale consideration received on sale of such shares by way of entering into dubious transactions in penny stock scrip. In view of the facts discussed above, I have reason to believe that income of Rs. 5,28,540/- chargeable to tax has escaped assessment, within the meaning of section 147 of the Act"

/AY.2013-14 Hansa Jitendra Haria vs. PCIT 16. We note that due to non-availability of documents and evidences, the assessing officer has failed to conduct the minimum enquiry or verification, during the course of assessment of penny stock case. The assessing officer has simply asked general questions in his notices, on which the assessee is wrongly placing reliance in his submission and contending that the AO has made enquiry in the matter. For example, the Financial Statements of the company were not examined, by the assessing officer. As per the financial statement of Global Securities Limited for the year ended 31" March, 2011: the Earning Per Share (EPS) was Rs. 0.0037 only and the Price Earning Ratio(P/E) at the price of Rs. 75 at which assessee sold her shares was an astronomical and unimaginable figure of 20270, which is unthinkable for any genuine company in the Indian stock market; there were fixed assets of Rs. 8.44 lakh only (incl 4.3 lakh of software); negligible employee cost of Rs. 1.22 lakh suggest that there are hardly any skilled manpower in the company; entire direct expenses comprises of loss on shares and profit for the year is just Rs.55,153/. All these facts clearly shows that the company doesn't have any financial strength and the prices of the shares were artificially raised by 37 times in a year with a PE ratio of 20270 to provide accommodation entry to assessee and others. Had the AO examined these financials or raised these pertinent questions, he would have clearly concluded the LTCG to be an accommodation entry. Further, neither the assessee has given the source of purchase nor the AO has enquired about the source of purchase, that is, with which bank account, the payment for purchases was made by the assessee. There is no proof available on record to show that purchase of shares has been made through the banking channel. Similarly, many such enquiries were never made by the AO. Therefore, we note that assessing officer has failed to conduct the basic enquiry and hence order passed by

/AY.2013-14 Hansa Jitendra Haria vs. PCIT d. On perusal of the purchase bill and sales bill, it is observed that the assessee has changed the broker, the assessee did not provide the statement to Demat account, the requisition made for account transfer. e. In a landmark decision, the Hon'ble Supreme Court in CIT vs Durga Prasad More [1971] reported in 82 ITR 540, rejected the documents produced before the Assessing Officer and held them to be of "no significance". The Hon'ble Apex Court observed as under (emphasis supplied): “....If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents....." In the instant case, the assessee has utterly failed to adduce anything in support of genuineness of the GLOBAL SECURE scrip. f. Vide letter dated 01.03.2025, the assessee stated that the assessee has requested to provide the documents/papers/information which was never provided to the assessee violating principle of natural justice. In this respect, it is stated that during the assessment proceedings, the assessee never requested for the said documents, in response to show cause notice, the assessee has requested for it. Furthermore, the details of investigation report and statements of key persons are mentioned in SCN. g. Further, the question of cross examination/verification of documents as said by the assessee has been examined in the light of various legal propositions. The assessee has not brought out anything on the record that there is concrete reasons even prima facie to not take cognizance of the statements recorded of third parties due to personal enmity or anything whatsoever. The statement is not the only basis to form the opinion in this case that transactions were not genuine albeit it has been analysed in the totality of the facts. h. Further, whether Right to Cross examination is a binding & absolute right applicable to Income Tax Proceedings has been adjudicated by various courts. Such right, as held in various decisions, is not an absolute right and depends not only on the circumstances of the case but also on the statute concerned. The assessee was obliged to satisfactorily demonstrate that the same was genuine. The assessee has failed to lead any evidence in this regard and consequently, fails the test of 'human probability' and 'surrounding circumstances. Without prejudice, it may be worth mentioning that the right to cross-examination is not an absolute entitlement in taxation. The Hon'ble Supreme Court in State of J&K v. Bakshi Ghulam Mohammad (AIR 1967 SC 122) held that a right of hearing cannot include a right of cross-examination and the right must depend on the circumstance of each case and must also depend on the statute under which the allegations are being enquired into.

/AY.2013-14 Hansa Jitendra Haria vs. PCIT i. The question whether the assessee is entitled to cross examination is a question which may largely depends on the facts and circumstances of the case (ef. ShyamlalBiri Merchant vs. UOI (1993) 68 ELT 548, 551(All.) In the present case no such circumstances are warranted as in the list of beneficiaries to whom the unaccounted money was routed into their account/books in the garb of Long Term Capital Gain were provided by the said group categorically contains the name and address of the assessee, further the group has categorically admitted that they were actively involved in this LTCG Scam. The case laws as cited in reply dated 01.03.2025 is not applicable in this case as it is not identical case as mentioned by the assessee. Since in the case of the assessee as submitted by the assessee vide letter dated 22.07.2024, the shares are not in physical formats hence share certificate are not applicable. However, in the case law mentioned by the assessee, the physical delivery of shares was proved by the memorandum of transfer of shares stated in the share certificate being registered on 30.10.2012. k. During the course of search and survey operation, it was clearly established that GLOBAL SECURE (scrip code -530657) is a penny stock which was used to facilitate introduction of unaccounted income in the form of Long Term Capital Gains. Further. as per the direction of the SEBI, the BSE has already suspended GLOBAL SECURE (scrip code-530657). l. In view of the above, the onus is on the assessee to prove that either there was no such scheme and even if so, the benefit to the assessee was as a result of genuine transaction. Further, the assessee has not been able to adduce cogent evidences or economic or financial justification for the sale price of these shares. Thus, the assessee miserably failed to discharge this onus with any supporting documentary evidence. m. Therefore, LTCG of Rs 5,26,730/- derived from sale of shares of GLOBAL SECURE(scrip code -530657) claimed as exempt u/s.10(38) of the IT Actis disallowed and treated as unexplained cash credit u/s.68 rws. 115BBE of the IT Act and added to the total income.”

/AY.2013-14 Hansa Jitendra Haria vs. PCIT 19. During the assessment proceedings, the assessing officer issued notice u/s. 142(1) of the Act dated 28.12.2021. The assessee has not submitted any reply against the notice u/s. 142(1) dated 28.12.2021. The assessing officer in the said notice asked the assessee to furnish investment held by him stating, Name of the Scrip, Date of Acquisition, Purchase Prince per Unit, No. of units Purchased, Date of Sale, Sale price per Unit, No. of Units sold. The assessing officer also required from the assessee to furnished name, PAN No. and address of the Share Brokers through whom the transactions in the scrip was done. However, the assessee has never submitted his reply before the assessing officer in the prescribed format. Hence the assessee has failed to submit the reply before the assessing officer in the prescribed format. However, we note that the assessee submitted the reply by letter dated 06.01.2022, thereafter the assessing officer has issued another show cause notice dated 17.03.2022 asking the assessee following information: 4. As per the penny stock transaction data available with this office, you have sold 7200 penny stock shares of GLOBAL SECUR (scrip code – 530657) worth Rs. 5,28,540/- during FT 2012-13 relevant to AY 2013-14. You have claimed exempt LTCG to the tune of Rs. 5,26,730/- in the return of income. The share price movement in the captioned scrip was seen from public domain and observed that there is share price rise which is prima facie not supported by financial fundamental of the scrip.

An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

Order is pronounced in the open court on 20/06/2025