DCIT-1(1), BHILAI vs. VIJAYA DESHLAHRA, INDORE

Brief facts of the case are that assessee has filed his return of income on 31/03/2024 declaring taxable income of Rs. 8,85,670/- and claimed exemption of long-term capital gains u/s. 10(38) of the Income Tax Act, 1961 (for short, “the Act”). In this case, Investigation Wing, Mumbai made some enquiries on the penny stock cases, who are indulged in converting black money into white money by way of claiming exempted long term capital gains u/s.10(38) of the Act. The Investigation Wing briefly explained the modus operandi on the ground that usually, beneficiaries buy the penny stocks and thereafter 4 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 approach certain mediators, and through them the share prices would be rigged and artificially increased to higher prices. At such hiked prices, the beneficiaries sell the shares through some of the exit providers thereby gaining high long term capital gains within a short span of time. The Assessing Officer (for short, "AO") held that assessee was one of such beneficiaries who got huge gains through sale of stocks and therefore there was escapement of income. Accordingly, notice was issued u/s. 148 on 06.05.2020 after taking prior approval from the competent authority. In response to the notice, the assessee filed return of income on 24.11.2020 by showing the same income. From the facts of the case, the AO further noticed that assessee initially purchased 2,00,000 shares of M/s. Banas Finance Ltd. through preferential allotment at a premium of Rs.10 at INR 20/- on 31.12.2010. The purchase consideration of Rs. 40,00,000/- was paid through banking channels. Subsequently, there was split in the shares on 24.08.2011, as per which face value was reduced to Re.1 against Rs.

“7.1. Data obtained from Bombay Stock Exchange was thoroughly verified and analysis was done as per share market fundamentals it is seen that during the year the assessee sale the share of M/s Banas Fianace Limited during the financial year relevant to the assessment year under consideration. After analysis and examination of records, it was found that the assessee sold the share for a consideration of Rs. 2,08,33,750/- during the F.Y 2012-13. 7.2. Share purchase / sale analysis: The shares of the company had been classified as a penny stock. Both purchase and sale of the shares of the company were concentrated within few persons /entities. The exit providers do not have creditworthiness. They were either non-filers or have filed nominal return of income. The enquiries by the Investigation Wing of the Department had also revealed that the company has been used to facilitate introduction of unaccounted income of members of beneficiaries in the form of exempt capital gain or short-term capital loss. 7.3. As per the information available in public domain, the earning per share (EPS) of the company was negligible. The net worth of the company was also negligible. Even though the net worth of the company and the business activity of the company were negligible, the share prices have been artificially rigged by the group of operators, to accommodate beneficiaries seeking Long Term Capital Gain and Losses. No prudent businessman and particularly a trader or investor in stock will invest in shares of such a company which is virtually defunct and inoperative.

6 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 8. Findings and conclusion The facts of the case, investigations made by the Directorates of Income- tax (Inv.), Data from Bombay Stock Exchange and other information like ITD data, Money-control.com website, Taxmann, Court rulings, internet it is held that the assessee in his books is pre-arranged to evade taxes and launder money. The facts and circumstances of the case and reasoning which substantiate the findings are summarized as under: (a) Mode of acquisition of the shares: The assessee purchased and sale of shares of this company which had no financial standing. The assessee has not given any logic as to why shares of such a quantity were purchased. (b) Sale of shares and unusual rise in the price: As discussed above the price movements of shares of the company were not in line with any commercial principle and market factors. (c) Findings of Investigation Wing: The findings of the Directorates of Income-tax (Inv.), Kolkatta and Mumbai, as discussed above have proved that associated brokers, entry operators and the assessees had chalked out an arrangement in which the share of penny stock companies were acquired by the assessees, the share prices were rigged and then with the help of entry operators by routing cash, shares were sold at high price to book exempt LTCG and at low price to book STCL or Business loss. d) Analysis of transactions: Facts emerged from investigation revealed that such trading transactions of purchase and sale of shares were not effected for commercial purpose but with the intention to create artificial Long Term Capital Gain/Short-term Capital loss/Business Loss with a view to evade payment of taxes. (i) Transactions in the shares of the penny company were not governed by market factors / conditions prevalent at the relevant point of time in such trade but same were product of design with mutual connivance on the part of the assessee and the operators. (ii) Cumulative events in such transactions of shares exposed that same were devoid of any commercial nature and fell in realm of not being bona fide and, hence, the claim of Long Term Capital Gain is not allowable.

7 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 (iii) The SEBI has also given findings that the prices of the shares of the company were determined artificially by manipulations and as such the same cannot be a product of market factors / conditions and commercial principals. (e) Failure of Assessee to discharge onus: The assessee has not been submitted to prove with justification the unusual rise and fall in share prices of the company to be natural and determined by market forces. It is, thus, evident that such share transactions were closed circuit transactions and clearly structured one. (f) Ignorance of the assessee about shares and penny stock companies: Assessee was unaware of the financials and fundamentals of the penny stock company, in whose shares the assessee has traded. (g) Financial analysis of the penny stock companies: The net worth of the penny stock company was negligible. Even though the net worth of the company and the business activity of the company was negligible, the share prices have been artificially rigged. (h) Cash trail in the accounts of the entry providers: The investigations into the fund flow analysis into the accounts of the entry providers have established that cash has been routed from various accounts to provide accommodation entry to the beneficiaries of the transactions. (i) Arranged transactions: The transactions entered into by the assessee involve a series of pre-conceived steps, the performance of each of which depended on as to how the others being carried out. The true nature of such share transactions lacked commercial contents, being artificially structured transactions entered into with the sole intent to evade the payment of taxes.

9. The facts and circumstances of the case, as narrated above, clearly suggest that the revenue cannot take or accept such make-believe transactions, as presented by the assessee, as genuine transactions. Truth or genuineness of such transactions must prevail over the smoke screen, created by way of pre-meditated series of steps taken by the assessee, with a view to imparting a colour of genuineness and character of commercial nature, to such share transactions. Needless to say, one has to look at the whole transactions and the series of steps taken to accomplish such share transactions, in an integrated manner, with a view to ascertaining the true nature and character of such purchase and sale of shares.

8 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 10. Thus, considering the findings of the Directorate of Investigation in relation to the inquiries conducted in the case of assessee, brokers, operators, entry providers and the nature of transaction entered into by the assessee, of Rs. 2,08,33,750/- is held as non-genuine. Resultantly, the alleged amount of Rs. 2,08,33,750/- received by assessee as sales proceeds on sale of shares of the alleged penny stock company is treated as unexplained cash credit u/sec. 68 of the I.T. Act and accordingly being added back to the total income of the assessee.”

6. That, being further aggrieved, the assessee preferred an appeal before the ld. CIT(A)-NFAC and the appeal was allowed partly, and similarly in all the matters emanating, therefore, the Revenue being aggrieved, had preferred the appeals and the assessee correspondingly had filed COs as evident from the captioned matter. The findings of the ld. CIT(A)-NFAC is not extracted but only referred to for the sake of brevity.

7. Be that as it may, the learned counsel submitted that facts and circumstances as aforestated are all similar for the appeals of the Revenue and the COs of the assessee. However, even without going into the merits of the matter, learned counsel submitted that though the additions have been made u/sec. 68 of the Act, but the principles of natural justice were not complied with, since the documents which were relied on by the Department and against the assessee, the copies of the same were not provided to the assessee. To demonstrate the 9 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 same, learned counsel referred to the reasons for reopening for A.Y. 2013-14 which was furnished to the assessee on 09/02/2021 and the same is extracted and made part of this order for the sake of completeness:-

“1. Brief details of the assessee: The above named assessee derives income from salary and other sources. The return of income for the Assessment year 2013-14 was filed on 31.03.2014 declaring total income at Rs. 8,85,670/- 2. Brief details of information available: On the basis of credible information available with the department in the case of Banas Finance Limited a penny stock company listed at Bombay Stock Exchange with script code (509053) has been used to facilitate introduction of unaccounted income of members of beneficiaries in the form of exempt Capital Gain/Loss (LTCG/STCG). Trade data of Banas Finance Limited was called for from BSE and it is found that Smt. Vijaya Deshlahara (PAN: AGOPD3899E) is one of the beneficiary who have traded in the script during the FY 2012-13 at Rs. 1,81,60,782 /-.

3. Analysis of information: It is found that the company in which the trading activity has occurred is one of the entities which is in the list of the penny stock shares as per CBDT, New Delhi.

4. Enquiries made as sequel to information: Trade data of Banas Finance Limited was called for from Bombay Stock Exchange and analyzed for ascertaining credentials. It is found that the above mentioned assessee has traded in this script during the FY 2012- 13 at Rs. 1,81,60,782/-.

6. Basis of forming reasons to believe and details of escapement of income: In view of the above facts, it is a strong case of escapement of income and hence it is considered to submit a proposal u/s 147(2)(b) of the Act. Therefore, I have reason to believe that income amounting to Rs. 1,81,60,782/- has escaped assessment for the AY 2013-14 within the meaning of Explanation 2(b) of section 147 of the IT Act, 1961. Further any such other income which comes to the notice subsequently in the course of assessment proceedings u/s 147 of the Act will also be looked into.

11 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 to refer to and to make relevant submissions before the Department. That, further, learned counsel referring to the relevant part of the draft assessment order show-cause notice dated 24/03/2022 for A.Y. 2013-14 wherein the relevant portion is extracted as follows:-

“6. On perusal of the details available and data available with various sources were examined, like ITD data, BSE data, Money-control.com website, Taxmann, Court rulings, Internet as well as report of the Investigation Wing of the Department and findings of Securities & Exchange Board of India (SEBI) following facts emerged: 6.1. Findings of the Investigation Wing. 6.1.1. The Directorate of Investigation, Mumbai had undertaken investigation into certain penny stocks (M/s Banas Finance Ltd.) being one amongst them) and has given detailed findings indicating bogus LTCG/STCL entries claimed by large number of beneficiaries. The modus operandi involving operators, intermediaries and the beneficiaries has been detailed in the investigation report prepared and disseminated by the Directorate of Income-tax (Inv.), Mumbai. 6.2. The basic aim of this dubious scheme was to route unaccounted money of beneficiaries into their account/books in the garb of Long Term Capital Gain / Short-term Capital Loss / Business Loss. This entry of LTCG is taken by selling the shares on the Stock Exchange and registering the proceeds arising out of the sale of shares into the books as LTCG. For implementing this scheme, shares of some Penny Stock companies were used. The same modus is adopted for providing accommodation entry of bogus LOSS. 6.3. In this scheme, the shares of the penny stock companies are acquired by the beneficiaries of LTCG at very low prices through the route of preferential allotment (private placement) and off market transaction. These shares have a lock-in period of one year as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. Another route to acquire the shares is through amalgamation or merger. In this route, the beneficiaries of LTCG are allotted shares of a Private Limited Company which is subsequently amalgamated with a listed penny stock and the beneficiaries receive shares of the listed penny stock in exchange of the shares of Private Limited Company. The shares in some cases were 12 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 acquired through Stock Exchange. Often the shares were subjected to split and bonus shares were issued to increase the volume. 6.4. Thereafter, the prices of the shares of the penny stock companies were rigged and are raised through circular trading. This is managed by the "operator" of the scrip. An "operator" is a person who is managing the overall affairs of the scheme and he is the one who contacts the entities who wish to take entry of bogus LTCG /STCL / Business Loss in their books and arranges the same through the scrip of penny stock companies. The operators manage many paper/bogus companies and use them to do circular transactions to rig the price of the shares. The shares of these penny stock companies, although listed on Stock Exchange, the companies were, in reality, held as closely held companies and were being controlled by the promoters and the operator, who is arranging for the bogus LTCG/STCL / Business Loss. This was due to the fact that the general publics were not interested in these shares as these companies had no credentials and these factors helped the operator to keep a control on the price movement of the shares. 6.5. Once the period of one year has passed and the share prices have been sufficiently rigged, the beneficiaries sell their shares at the inflated prices on the Stock Exchange. A point worth noticing emerged during the course of investigation by the Investigation Wing is that the purchase of the shares of the penny stock company is not made by the public but by the bogus entities managed and controlled by the promoter of the penny stock company or the operator, which are referred to as "Exit Providers". The unaccounted money of the beneficiaries is routed to these bogus entities "Exit Providers" and the shares held by the beneficiaries are bought by these bogus entities from the money which is the unaccounted money of the beneficiaries. Sometimes, the shares of the LTCG beneficiaries are purchased by the beneficiaries of LOSS who later sell their shares when the price falls and hence book bogus LOSS in their books. All these transactions are done on the Stock Exchange and where the sale of shares are done after a holding of one year they fall into the category of Long Term Capital Gain which is exempt income as per the provisions of the I.T. Act, 1961. 6.6. During the course of investigation by the Directorate, statements of various operators, entry providers and the stock brokers were recorded wherein they have admitted of providing accommodation entries in the form of LTCG/STCL/Business Loss.

13 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 7. Findings in the case of Assessee. 7.1. Data obtained from Bombay Stock Exchange was thoroughly verified and analysis was done as per share market fundamentals it is seen that during the year the assessee sale the share of M/s Banas Fianace Limited during the financial year relevant to the assessment year under consideration. After analysis and examination of records, it was found that the assessee sold the share for a consideration of Rs. 2,08,33,750/- during the F.Y 2012-13. 7.2. Share purchase / sale analysis: The shares of the company had been classified as a penny stock. Both purchase and sale of the shares of the company were concentrated within few persons /entities. The exit providers do not have creditworthiness. They were either non-filers or have filed nominal return of income. The enquiries by the Investigation Wing of the Department had also revealed that the company has been used to facilitate introduction of unaccounted income of members of beneficiaries in the form of exempt capital gain or short-term capital loss. 7.3 As per the information available in public domain, the earning per share (EPS) of the company was negligible. The next worth of the company was also negligible. Even though the net worth of the company and the business activity of the company were negligible, the share prices have been artificially rigged by the group of operators, to accommodate beneficiaries seeking Long Term Capital Gain and Losses. No prudent businessman and particularly a trader or investor in stock will invest in share of such a company which is virtually defunct and inoperative.”

14 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 2. No documents which are relied upon by you related to the proposed addition were ever provided to me which is against the law of natural justice and any order passed without providing such documents was held as illegal by Hon'ble Supreme Court in various cases. Further, we would like to invited your kind attention to the Taxpayer Charter issued by the Income Tax Department (attached as Annexure 9), now incorporated in law as section 119A of the Income Tax Act, 1961, which provides a framework to the entire department for its commitment towards the tax payers. In light of the above, we would like to invite your attention specifically to point 1, point 4 and point 14 of the same and based on the same, again make a request to take all the information submitted by us into consideration and provide all documents relied upon by you in order to initiate proceedings u/s 148. Same is attached as Annexure 1.

4. No opportunity to cross-examine of the persons whose statements relied upon by you was given to me.

5. Since, section 147 is not in the statute w.e.f. 01-04-2021, any order passed under this section will be illegal.

15 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 Therefore it is requested to not make the proposed variation in the returned income.”

10. Learned counsel referring to the afore-stated at para 2 wherein the assessee had contended that no documents which are relied upon by the Department for the proposed addition were ever provided to the assessee which was therefore against the principles of natural justice. At this stage, the Bench had put a query to the ld. CIT-DR regarding the violation of principles of natural justice as assailed by the assessee and for his response and the ld. CIT-DR responded that given the facts and circumstances that such documents were not provided to the assessee, the matter may be best remanded back to the file of the ld.CIT(A)-NFAC providing one more opportunity to the assessee and directing the Department to furnish all the relevant documents to the assessee as well. Learned counsel for the assessee responding to the submission of the ld. CIT-DR, agreed with the same, however, submitted that since the additions were made without complying with the principles of natural justice, the same ought to be deleted.

16 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 notice, draft assessment order and the reasons for reopening, there are specific information against the assessee with the Department which triggered the concerned addition in the hands of the assessee which however were partly allowed by the ld. CIT(A)-NFAC. But the fact of the matter is, as contended by the learned counsel, the very basis of dispensing justice depends on compliance on the principles of natural justice. The information i.e. “credible information; list of penny stock shares as per CBDT”, these were never provided to the assessee for representation of the case. There are no evidence on record to suggest that the said documents were provided to the assessee. In other words, the contentions of the learned counsel to the fact that the principles of natural justice were not complied with by the Revenue while completing the reassessment proceedings, appears to be therefore correct on record and needs to be appropriately complied with by the Department. Balancing scales of justice, one opportunity is provided to the Department for furnishing the relevant details/documents to the assessee. It is a matter of common knowledge that all information which are collected against the assessee by the quasi-judicial authority need have to be provided to the assessee for his self-defence and submissions before the authority.

17 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 That, further from the point of view that Income-tax Act is within the purview of welfare legislation which are completely separate from penal legislation, therefore, in dispensing justice, the principles of natural justice plays a core effect which has to be complied with by the authorities. Reverting to the facts on this issue in the present case before us, as we have examined and observed, there seems to be a shortfall regarding compliance of natural justice by the Revenue. Therefore, we are of the considered view that the order of the ld. CIT(A)- NFAC needs to be set aside and remanded back to its file for denovo adjudication as per law. The ld. CIT(A)-NFAC shall, accordingly, furnish all the documents as had been requested by the assessee and after receiving the reply from the assessee, the ld. CIT(A)-NFAC shall pass a speaking order in terms of sec. 250(4) & (6) of the Act. The assessee shall also comply with the hearing notice(s) from the office of ld. CIT(A)-NFAC. We order accordingly. As per above terms without even going into the merits of the matter, the grounds in the captioned appeal as well as the CO stands allowed for statistical purposes.

18 ITA.Nos.92-94/RPR/2025 COs No.08-10/RPR/2025 13. That, since the appeals and the corresponding COs have same facts and circumstances and identical issues and even the issue with regard to the natural justice travels through all of them, therefore, our decision in COs also as per similar terms.

Order pronounced in the open Court on 03.07.2025.