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Facts
The assessee, engaged in trading, reported long-term capital gains from selling shares of PS IT Infrastructure and Services Limited (PS IT), claiming exemption under Section 10(38). The Assessing Officer (AO) denied this exemption, making an addition under Section 68, alleging the transactions were dubious and part of a penny stock racket.
Held
The Tribunal held that the assessee had discharged the burden of proving the genuineness of the transactions by providing documentary evidence, including bank statements, DMAT account details, and broker contract notes. The AO failed to produce cogent material to controvert these evidences or establish the assessee's involvement in price rigging or providing accommodation entries.
Key Issues
Whether the long-term capital gains from the sale of PS IT shares are taxable as unexplained income under Section 68, or if they are eligible for exemption under Section 10(38) based on the genuineness of the transactions.
Sections Cited
10(38), 68, 69C, 143(3), 133(6), 131, 133A, 142(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “F” BENCH MUMBAI
Before: SHRI PAVAN KUMAR GADALE & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2023-24/1059029546(1), dated 23.12.2023, passed against the assessment order by Income Tax Officer-19(3)(5), Mumbai, u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 28.12.2017 for AY 2015-16.
2. Grounds taken by the assessee are in respect of addition made under section 68 by denying exemption claimed under section 10(38) of the Act for the sale proceeds of listed equity shares alleged as penny
Vikram N. Chandan., AY 2015-16 stock amounting to ₹ 1,01,38,461 and for addition of ₹ 5,06,923 under section 69C as unexplained commission estimated @ 5% on the sale proceeds of the said alleged shares.
Brief facts of the case are that assessee is engaged in the business of trading in ferrous and non-ferrous metals. Return of income was filed on 28.08.2015 reporting total income at ₹ 12,08,750/-. Case of the assessee was taken up for scrutiny assessment by issuing notice under section 143(2), dated 29.09.2016 based on information from the Investigation Wing of the Department that the assessee had transacted in certain shares characterised by the Department as penny scrip. After necessary investigation and examination, said assessment proceeding was completed by passing order under section 143(3) dated 28.12.2017. In this assessment, ld. Assessing Officer enquired about the capital gain of ₹ 99,80,463/- on sale of shares of PS IT Infrastructure and Services Limited (PS IT), claimed as exempt under section 10(38) of the Act. Assessee furnished necessary details in this respect. It is to be noted that assessee had reported total long-term capital gain of ₹ 1,00,09,012/- on sale of various listed shares which included long-term capital gain on the alleged penny scrip of PS IT also. Statement showing long-term capital gain earned by the assessee during the year on sale of shares of various companies including the alleged penny scrip of PS IT is extracted below:
Vikram N. Chandan., AY 2015-16 3.1. Assessee had purchased 20,000 shares of Crescent Digital Technologies Ltd. on 16.07.2012 from Microchip Infotel Pvt. Ltd. in off- line mode. Subsequently, the shares were sent for dematerialisation (DMAT) and were dematerialised on 30.01.2013. The said company was later on merged with the other company that is, Parag Shilpa
Vikram N. Chandan., AY 2015-16 Investment Ltd on 13.08.2013 under the scheme of amalgamation as per the order of the Hon’ble High Court of Bombay. Name was changed to PS IT. Consequently, assessee received 20,000 shares of PS IT. Assessee sold 9,700 shares between the period from 06.06.2014 to 04.09.2014 in the price range of ₹ 500/- per share. Subsequently, shares were split of face value of rupees 10/- each into 10 shares of face value Re.1/- each that is, in the ratio of 1:10. Thus, assessee received 1,03,000 shares of face value of Re.1/- each on 05.09.2014. Out of these shares, assessee sold 61,000 shares during the year up to 31.03.2015 on the platform of Bombay Stock Exchange (BSE) through SEBI registered broker. This entire factual metrics is presented by the chart reproduced below:
3.2. Case of the assessee was taken up for assessment on the basis of investigation by the DDIT (Inv.), Kolkata. In the course of assessment, Ld. Assessing Officer called for details and explanations in respect of the transaction of sale of shares on which exemption has been claimed
Vikram N. Chandan., AY 2015-16 under section 10(38) on account of long-term capital gain earned by the assessee. To corroborate the facts, assessee furnished the relevant documentary evidences which are placed on record in the paper book before us, containing 217 pages. These include: i. details of bank account held by the assessee and copies of their bank statements ii. Copy of DMAT account iii. Copy of contracts-cum-bills from the share brokers iv. Copy of allotment letter v. Copy of share certificate of Crescent Digital Technologies Pvt. Ltd. vi. Copy of money receipt from Microchip Infotel for the payment made for purchase of shares vii. Copy of High Court order for amalgamation of the companies viii. Copy of complete set of tax audit report along with audited financial statements of the assessee
In the course of assessment, statement of assessee was recorded by the Ld. Assessing Officer to verify the genuineness of the share transactions, part of which are reproduced in the impugned assessment order. In the said statement, assessee had given the details relating to the share transactions undertaken by him. Ld. Assessing Officer also issued notices under section 133(6) to the purchaser of the shares sold by the assessing, referred to as “exit providers” which according to him remained un-complied. Ld. Assessing Officer also referred to statement of one Mr. Anuj Agarwal who according to him was running the racket of providing accommodation entries by manipulating the share prices of alleged penny scrip of the PS IT. Ld. Assessing Officer noted that statement of Mr Anuj Agarwal was recorded under section 131 during
Vikram N. Chandan., AY 2015-16 the course of survey operation under section 133A by the DDIT (Inv.), Kolkata to state that he had provided accommodation entries in the alleged penny scrip.
4.1. Assessee had submitted that transaction in the said shares were subjected to STT levy and consideration of sale and purchase for the said scrip had been routed through normal banking channel and no addition can be made without backing of any shred of evidence, more particularly when name of the assessee does not appear in any of the reports as beneficiary of the alleged scrip transaction.
4.2. Ld. Assessing Officer, after considering the submissions made by the assessee, arrived at the adverse conclusion by observing that there is unusual rise in the price of the shares sold by the assessee which has been investigated by the Investigation Wing of the Department to establish that cash has been routed from various accounts to provide accommodation to the assessee and that assessee had failed to discharge his bonus to prove the unusual rise and fall of share prices. Ld. Assessing Officer placed heavy reliance on the statement of one Mr Agarwal to hold that it is only a colourful device where the apparent is not the real. Assessing Officer also relied on the doctrine of preponderance of human probability to hold that the assessee is indulged in bogus and dubious share transactions since he had not been able to adduce cogent evidences in this regard. Ld. Assessing Officer also noted that assessee did not produce the purchasers of the shares sold by him.
4.3. It is worth noting that before drawing adverse conclusion, ld. Assessing Officer took note of the fact of submissions made by the Vikram N. Chandan., AY 2015-16 assessee for which he stated in para 5 as “This Long Term Capital Gain is shown as received in your return of income. During the course of assessment you have furnished purchase bill of shares, bank statements, Demat statements and some broker notes to strengthen your claim of Long Term Capital Gain.” He deliberated on the general modus operandi of such transactions as well as background of the investigation carried out by the wing. He illustrated the cash trail prepared by the Investigation Wing “on a sample basis” and also casually noted about “some orders passed by SEBI on the issue of manipulation of share market for providing accommodation entry of bogus LTCG” though without pinpointing anything specific towards assessee, in this regard.
4.4. Ld. Assessing Officer, thus completed the assessment by making an addition u/s 68 of the Act towards entire sale consideration of Rs. 1,01,38,461/- received by the assessee on the transaction of sale of shares in the aforesaid scrip. The addition is made only in respect of one scrip of PS IT and not others on which also LTCG is earned by the assessee. Aggrieved, assessee went in appeal before the CIT(A) who upheld the same by simply relying on the decision of Hon’ble High Court of Calcutta in the case of Swati Bajaj & others v. PCIT [2022] 446 ITR 56 (Cal) by stating that issue agitated is a covered matter which has been examined in detail by the Hon’ble Court. Aggrieved, assessee is in appeal before the Tribunal.
5. Before us, ld. Counsel for the assessee has reiterated the submissions made before the authorities below. He has also placed on record all the relevant documents and evidences in the form of paper book, details of which are already noted above, backed by judicial
Vikram N. Chandan., AY 2015-16 precedents of the Hon’ble jurisdictional High Court of Bombay. The submissions so made are not reiterated to avoid duplicity.
We note that transactions for purchase was undertaken in an off- line mode which is an acceptable mode and that of the sale of the aforesaid shares were undertaken on the stock exchange platform through the SEBI registered broker on which STT was levied and the consideration was routed through normal banking channel. The entire flow of these transactions is corroborated by relevant documentary evidences placed on record. While making the addition, there are no discrepancies pointed out by the Assessing Officer in the documents and the details furnished by the assessee. Ld. AO has not bothered to discuss or point out any defect or deficiency in the documents furnished by the assessee. These evidences furnished have been neither controverted by the Ld. AO during the assessment proceedings nor anything substantive brought on record to justify the addition made by him. At any stage of the present case, Revenue has not brought on record any material about participation of the assessee with any such dubious transactions relating to accommodation entry, price rigging or exit providers. To our mind, Ld. AO could have taken an adverse view only if he could point out the discrepancies or insufficiency in the evidence and details furnished in his office. Once the assessee has produced documentary evidence to establish the veracity of his claim, the burden would shift on the Revenue to establish its case.
On the perusal of records, it is discernible that ld. Assessing Officer had proceeded on the basis of analysis of the financials of the company. According to him, sharp jump in the share prices of the aforesaid scrip is not justified. He has relied upon the search and survey
Vikram N. Chandan., AY 2015-16 operations conducted by the investigation wing of the Department at various locations in respect of alleged penny stock which sets out the modus operandi adopted in the business of providing entries for bogus capital gains. The conclusion drawn by the ld. Assessing Officer of implicating the assessee is un-supported by any cogent material on record. The finding arrived at by the ld. Assessing Officer is thus purely an assumption based on conjectures and surmises. In our thoughtful considerations to the facts and circumstances of the case, it is not in controversy that assessee has discharged his burden by submitting the relevant documents, details of which are already extracted above, forming part of the paper book.
7.1. For our above observations and findings, we place reliance on the decision in the case of CIT vs. Jamnadevi Agrawal [2012] 20 taxmann.com 529 (Bom), wherein it was held that transactions of purchase and sale of shares cannot be considered to be bogus, when the documentary evidences furnished by the assessee establish genuineness of the claim. We also draw our force from the decision of Hon’ble High Court of Delhi in the case of PCIT v. Krishna Devi [2021] 126 taxmann.com 80 (Del) wherein the Hon’ble Court noticed that the reasoning given by the Assessing Officer to disbelieve the capital gain declared by the assessee, viz. astronomical increase in the price of shares, weak fundamentals of the relevant companies are based on mere conjectures.
7.2. Reliance placed by the ld. Assessing Officer on the report of investigation wing without further corroboration based on cogent material does not justify the conclusion that the impugned transaction is bogus, sham and part of racket of accommodation entries. It does not Vikram N. Chandan., AY 2015-16 prove that the assessee has carried out the impugned transactions of purchase and sale of shares in connivance with the people who were involved in the alleged rigging of share prices. In absence of any such material, enquiry and examination, the addition made pertaining to receipt of sale consideration of the impugned transaction cannot be sustained. In our considered view, ld. Assessing Officer has not established that the assessee was involved in price rigging.
We note that ld. Assessing Officer has observed about the so- called purchasers of shares sold by the assessee who have not been identified even though notices were issued u/s.133(6) of the Act. In this context, it is worth noting that impugned share sale transactions undertaken by the assessee are on the online digital trading platform of stock exchange of BSE which is a regulated market under the aggies of a regulator viz. SEBI. There is nothing on record from the market regulator SEBI for the relevant period which establishes the ‘tainted’ status of the scrip involved in the present case, so as to hold the share sale transactions as bogus/accommodation entry as alleged by the ld. AO. It is important to note that the operations and modus operandi of this regulated market does not in any way provide for any mechanism by which assessee can bring forth the identity of the buyers of his shares and their creditworthiness. Further, sale proceeds are received through the stock market process into the pre-identified bank account of the seller i.e., the assessee which cannot be tainted as ‘unexplained or unaccounted or undisclosed’ money for the addition made u/s. 68 by the ld. Assessing Officer.
8.1. Section 68 of the Act essentially requires the assessee to explain the nature and source of the sum credited in his books of account to Vikram N. Chandan., AY 2015-16 the satisfaction of the ld. Assessing Officer. Time and again, Hon’ble Courts have held the requirement of establishing the identity and creditworthiness of the party and genuineness of the transaction to meet the said requirements of section 68. In the present set of facts, as already stated above, operations and modus operandi of the regulated stock markets (BSE) does not in any way provide for any mechanism by which assessee can bring forth the identity of the buyers of his shares and their creditworthiness. Meeting this requirement is an act of impossibility of performance expected from the assessee for the transaction executed on SEBI regulated, digitally operated stock exchange. For the third limb of genuineness of the transaction, sale proceeds are received through the stock exchange process into the pre- identified bank account of the seller i.e., the assessee. Further, it is not a case of mere book entry where a possibility of tainting it as bogus or sham exists but it is a case where actual movement of dematerialised shares has taken place from the DMAT account of the assessee. Furthermore, the said shares are being currently traded on the stock exchange as demonstrated by the assessee from the screen shot of the website of www.bseindia.com dated 29.05.2024 at Rs. 20.42, furnished at the direction of the bench. In our considered view, assessee cannot be put to the rigors of section 68 in respect of sale proceeds received for sale of shares on the stock exchange (BSE).
Admittedly, it is also a fact on record that similar sale transactions of shares were undertaken by the assessee of other listed shares on the same platform of the stock exchange which have been accepted by the ld. Assessing Officer without any disallowance or addition. The same is evident from the statement of LTCG extracted above. Further, assessee continues to hold 42,000 shares of the PS IT along with shares of other
Vikram N. Chandan., AY 2015-16 companies duly reported in the balance sheet as on 31.03.2015. Shares of other companies include WESCOS, Anantraj, GIC Housing, Adani Power, Electro Steel, Edelweiss Cap and Unichem Lab.
From the perusal of the statement of assessee recorded by the ld. Assessing Officer during the course of assessment, part of which is reproduced in the impugned order, demonstrates that he is a long-term investor and is aware of his DMAT account, brokers through whom transactions were undertaken, shares in which he had invested and stock market operations. He produced all the relevant documentary evidences in the assessment proceedings before the ld. Assessing Officer in support of his deposition in the statement recorded. From all of this, we notice that assessee has – a. purchased the shares under accepted off-line mode by making payment through banking channel. b. dematerialized the shares purchased by credit to the DMAT account and part of it were later sold out of the holding. c. sold the shares on the platform of recognised stock exchange on the then prevailing prices. d. received the sale proceeds through stock market process in his bank account.
10.1. From the above, we note that ld. Assessing Officer has not brought on record any material to show that assessee was part of any group which was involved in the manipulation of share prices. Suspicion by the ld. Assessing Officer on the purchase and sale of shares is baseless.
Vikram N. Chandan., AY 2015-16 10.2. Ld. Assessing Officer, while drawing the adverse conclusion noted about the cash trail in the accounts of entry providers. He based his conclusion on the finding of investigations done by the Investigation Wing rather than bringing on record any direct and cogent material to establish existence of such a cash trail where the assessee has transacted in cash. In this respect, in the absence of any corroborative material brought on record by the authorities below, we hold against drawing such inference or presumption.
We also note that ld. Assessing Officer did not allow the assessee to cross examination the parties whose statements were relied upon by him for drawing the adverse conclusion. Such an approach adopted by ld. Assessing Officer is not in compliance with the provisions of section 142(3) of the Act which is a statutory mandatory procedural requirement for making a valid assessment. We note that the required compliance with section 142(3) has not been met.
As already noted above, ld. Assessing Officer has referred to the theory of preponderance of probability which according to us is applied to weigh the evidence of either side and draw a conclusion in favour of a party which has more favourable factor in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumption of fact that might go against the assessee. Once nothing has been proved against the assessee with the aid of any direct material, nothing can be implicated against the assessee on the presumption or suspicion, howsoever, strong it might appear to be true.
Vikram N. Chandan., AY 2015-16
For our observations and to arrive at the findings, we find force of binding nature from the decisions of Hon'ble High Court of Bombay being a jurisdictional High Court:
i) Pr. CIT v. Ziauddin A Siddique [Income-tax Appeal No. 2012 of 2017, dated 4-3-2022] held as under:-
"1. The following question of law is proposed:
"Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was justified in deleting the addition of Rs. 1,03,33,925/- made by AO u/s 68 of the I.T. Act, 1961, ignoring the fact that the shares were bought/acquired from off market sources and thereafter the same was DMATed and registered in stock exchange and increase in share price of Ramkrishna Fincap Ltd. is not supported by the financials and, therefore, the amount of LTCG of Rs. 1,03,33,925/- claimed by the assessee is nothing but unaccounted income which was rightly added u/s 68 of the I. T. Act, 1961?"
We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd. ("RFL") is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax ("STT") has also been paid. The Assessing Officer also has not criticized the documentation involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL.
3. Therefore we find nothing perverse in the order of the Tribunal.”
4. Mr. Walve placed reliance on a judgment of the Apex Court in Principal Commissioner of Income-tax (Central)-1 v. NRA Iron & Steel (P.) Ltd. but that does not help the revenue in as much as the facts in that case were entirely different.
In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.
6. The appeal is devoid of merits and it is dismissed with no order as to costs."
Vikram N. Chandan., AY 2015-16 ii) PCIT vs. Indravadan Jain HUF [2023] 156 taxmann.com 605 (Bom) wherein it was held: “Where shares were purchased by assessee on floor of stock exchange and not from broker, payment was made through banking channel, deliveries were taken in DMAT account where shares remained for more than one year, contract notes were issued and shares were also sold on stock exchange, there was no reason to add capital gains as unexplained cash credit under section 68” iii) CIT vs. Shyam R. Pawar [2015] 54 taxmann.com 108 (Bom) wherein it was held:
“Where DMAT account and contract note showed details of share transaction, and Assessing Officer had not proved said transaction as bogus, capital gain earned on said transaction could not be treated as unaccounted income under section 68”
Ld. CIT(A) has without dealing with the facts and detailed documentary evidences placed on record by the assessee, dismissed the appeal by stating that issue is a covered matter by the decision in the case of Swati Bajaj (supra). In the said decision, it was held that assessee had to establish the genuineness of rise in price of shares within a short period of time that too, when general market trend was recessive. However, we note that there are several decisions of Hon'ble Jurisdictional High Court as stated supra which are in favour of the assessee. Accordingly, the same would prevail on the issue before this Tribunal. In the present case, decision of the Hon'ble Non-Jurisdictional High Court carries only a persuasive value. The law is very well settled by the Hon'ble Supreme Court in the case of Union of India vs Kamalakshi Finance Corporation Ltd reported in 55 ELT 43 (1991) that the decision of Hon'ble Jurisdictional High Court would have higher precedence value on the Tribunal than the decision of Hon'ble Non- Jurisdictional High Court. Hon'ble Supreme Court emphasised therein that the orders of Tribunal should be followed by the authorities falling
Vikram N. Chandan., AY 2015-16 within its jurisdiction so that judicial discipline would be maintained in order to give effect to orders of the higher appellate authorities. The Hon'ble Apex Court has observed that utmost regard must be had by the adjudicating authorities and the appellate authorities to the requirement of judicial discipline. Respectfully following the same, we deem it fit and appropriate to follow the decisions of Hon'ble Jurisdictional High Court of Bombay referred supra wherein the impugned issue is decided in favour of the assessee. Moreover, when there are conflicting decisions of various High Courts on the same issue, the Hon'ble Supreme Court in the case of Vegetable Products reported in 88 ITR 192 (SC) had held that construction that is favourable to the assessee should be adopted. Hence by following this principle, reliance placed by ld.CIT(A) on the decision of Hon'ble Calcutta High Court in Swati Bajaj (supra) does not hold its fort. Further in the present case, we find that assessee has duly established the nature and source of credit representing sale proceeds of shares of PS IT.
Considering the totality of facts and circumstances of the case, factual matrix and submissions of parties narrated as well as discussion and observations made herein above, we delete the addition made u/s 68 towards proceeds of sale of listed shares of PS IT which gave rise to Long Term Capital Gain on the said sale, claimed exempt by the assessee u/s 10(38). Accordingly, grounds taken by the assessee in this respect are allowed.
Addition made by the ld. Assessing Officer on estimate basis towards commission for arranging alleged artificial capital gains @ 5% amounting to Rs. 5,06,923/- is consequential to the addition made towards receipt of sale proceeds of alleged penny stock. Since we have Vikram N. Chandan., AY 2015-16 deleted the said addition towards sale proceeds of alleged penny stock in terms of above stated observations and findings, this consequential addition of commission has no foundation to stand. Accordingly, the same is deleted. Grounds taken by the assessee in this respect are allowed.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 30 July, 2024