Case Law Details
ITO Vs Mahaveer Sukhanraj Kawar (ITAT Mumbai)
The case involves three appeals—one filed by the Revenue and two by the assessee—arising from separate orders of the first appellate authority for Assessment Years (AY) 2014–15 and 2015–16. Since the issues involved were substantially similar, the appeals were heard together and disposed of through a common order.
The central issue relates to the denial of exemption under Section 10(38) of the Income Tax Act, 1961, claimed by the assessee on Long Term Capital Gains (LTCG) arising from the sale of shares. An ancillary issue concerns the addition made on account of alleged commission paid for obtaining accommodation entries through such gains.
The assessee, an individual earning income from salary, other sources, and capital gains, had acquired 15,000 shares of a company through preferential allotment at a premium, which later resulted in holding 1,50,000 shares after a stock split. During the relevant assessment years, the assessee sold a portion of these shares on the Bombay Stock Exchange (BSE) through SEBI-registered brokers. The transactions yielded substantial LTCG, which was claimed as exempt under Section 10(38).
During assessment proceedings, the Assessing Officer (AO) relied on a report of the Investigation Wing, Kolkata, which categorized the company’s shares as “penny stock.” The AO noted an abnormal rise in the share price inconsistent with the company’s financials and concluded that the LTCG claimed was not genuine but an accommodation entry. Consequently, the AO denied the exemption, treated the gains as unexplained cash credit under Section 68, and added an amount as commission allegedly paid for arranging such entries.
The assessee challenged these additions before the first appellate authority, which largely upheld the AO’s findings, except for granting minor relief on a computational issue.
Before the Tribunal, the assessee contended that all transactions were genuine and supported by documentary evidence. It was argued that the shares were held in dematerialized form, transactions were conducted through recognized stock exchange platforms, and payments were made through banking channels. The assessee emphasized that all relevant documents were submitted and no deficiencies were identified by the authorities. It was further argued that the suspension of trading in the company’s shares by BSE occurred after the assessee’s transactions and therefore could not affect their genuineness. The assessee also pointed out that they were a regular investor and that other share transactions during the same period were accepted by the AO without any adverse findings.
The Revenue, on the other hand, relied heavily on the assessment order and the Investigation Wing’s report, maintaining that the transactions were part of a penny stock scheme.
Upon consideration of the submissions and material on record, the Tribunal observed that the additions were primarily based on the Investigation Wing’s report. Although the AO had issued notices to certain parties, no conclusive adverse material emerged from such enquiries. The Tribunal noted that the shares were listed on BSE, transactions were executed through SEBI-registered brokers, and documentary evidence supporting the transactions had been furnished without any defects being pointed out.
The Tribunal further observed that the statement of a former director of the company did not indicate any irregularity in the allotment process and confirmed that allotment was subject to BSE procedures. It also noted that the assessee was a habitual investor, and the AO had accepted other share transactions during the same period.
The Tribunal found that the suspicion regarding the transactions was largely based on the Investigation Wing report and subsequent suspension of trading in the shares, which occurred after the assessee’s transactions and was temporary in nature. It was also noted that no evidence was produced to invalidate transactions conducted prior to the suspension.
Relying on decisions of coordinate benches in similar cases involving the same scrip, the Tribunal held that the assessee had discharged the burden of proof by providing documentary evidence. It emphasized that additions cannot be sustained merely on the basis of general reports or presumptions without independent verification or contrary evidence.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These are bunch of three appeals, one by the Department and two by the assessee arising out of separate orders of ld. First appellate authority. While, there are cross appeals for Assessment Years (AY) 2014-15, appeal in A.Y. 2015-16 is by the assessee alone.
2. Be that as it may, since appeals relate to the same assessee and issues are more or less common, they are clubbed together and disposed of in a common order for the sake of convenience.
3. The core issue arising in the appeals is in the context of denial of assessee’s claim of exemption u/s. 10(38) of the Income Tax Act, 1961 (in short the ‘Act’) in relation to Long Term Capital Gain (LTCG) declared on sale of shares. Of course, there is an ancillary issue of addition of commission paid on account of accommodation entry availed through bogus long term capital gain.
4. Briefly the facts relating to the disputed issues are, the assessee is a resident individual stated to be deriving income from salary, other sources and capital gain. The assessee acquired 15000 shares of Lifeline Drugs and Pharma Ltd. having face value of Rs.10/- each at a premium of Rs.50/- per share for a total consideration of Rs.9,00,000/- on 31.03.2014 on preferential allotment basis. Subsequently, the shares were split to face value of Rs.1/- on 19.11.2013. As a result, assessee came to hold 1,50,000 shares. During the Assessment Years 2014-15 and 2015-16, the assessee sold 53000 and 45750 shares respectively on Bombay Stock Exchange (BSE) platform through a share broker registered with Securities and Exchange Board of India (SEBI). Such sales resulted in net `LTCG’ of Rs.95,58,164/- in Assessment Year 2014-15 and Rs.1,07,84,798/- in AY 2015-16. The resultant capital gain was claimed as exempt u/s. 10(38) of the Act in the return of income filed for the assessment years under dispute.
5. In course of scrutiny assessment proceeding, the Assessing Officer noticed that as per the report of the Investigation Wing, of the Department at Kolkata Lifeline Drugs and Pharma Ltd. is categorized as a penny stock company. He further observed that detailed investigation was carried out in relation to the scrip of the said company by the Investigation Wing, in course of which, statement was recorded u/s. 131 of the Act from one Shri Anil Prakash chand Sanklecha, ex-Director of the company who though admitted that he knew the assessee, however, he had in no manner helped the assessee in acquiring the shares on preferential allotment basis. In course of assessment proceeding, the assessee was also examined u/s. 131 of the Act. Based on the statements recorded and the report of the Investigation Wing, the Assessing Officer ultimately concluded that the scrips of Lifeline Drugs and Pharma Ltd. are in the nature of penny stock. He observed that the astronomical rise in the price of scrip is not commensurate with the financials of the company. Thus, ultimately, he held that the ‘Long Term Capital Gain’ claimed by the assessee is bogus and in the nature of accommodation entry availed by the assessee on payment of commission. Therefore, not only the Assessing Officer rejected the claim of Long-Term Capital Gain and exemption u/s. 10(38) of the Act but he added the amounts as unexplained cash credit u/s. 68 of the Act. He made further addition on account of alleged commission paid by the assessee for availing the accommodation entry.
6. Contesting the additions made by the Assessing Officer, the assessee preferred appeals before learned First Appellate Authority. Except granting partial relief in AY 2014-15 on account of computational error, the First Appellate Authority did not interfere with the decision of the Assessing Officer.
7. Before us, learned counsel appearing for the assessee submitted that though the scrips of Lifeline Drugs and Pharma Ltd. were acquired on preferential basis however they were credited in Demat accounts of the assessee. Further, she submitted, the company is listed with BSE and transactions were done through reputed SEBI registered share brokers. She submitted, the transactions were effectuated through stock exchange and through banking channel. She submitted, all documentary evidences relating to the transactions were furnished before the Assessing Officer and learned First Appellate Authority. She submitted, without finding any deficiency in the documentary evidences, purely based on the report of the Investigation Wing the additions have been made by the Departmental Authorities. She submitted, while making the additions, the Assessing Officer has stated that BSE has suspended the sale of scrips of the company in August, 2015, which is much after assessee’s transactions. Therefore, for that reason, the share transactions cannot be held as non-genuine. She submitted, the assessee is a regular investor in shares and during the relevant assessment years, the assessee has transacted in other scrips as well and nothing adverse has been found by the Assessing Officer in respect of those transactions.
8. Learned counsel submitted, in respect of other assessees who reported LTCG from sale of shares of Lifeline Drugs and Pharma Ltd., the ITAT has deleted similar additions made by the Assessing Officer. In this context she relied upon the following decisions:
1. Smt. Radhika Garg vs. ITO, ITA No. 4738/Del/2018.
2. Smt. Nishika Aggarwal vs. ITA No. 2429/De1/2018.
3. ITO vs. Smt. Radhika Garg MA No. 515De1/2019.
4. Smt. Ritu Jain vs. ACIT ITA No. 9358/De1/2019.
5. Anoop Jain vs. ACIT ITA No. 6703/De1/2019.
9. Per contra, learned Departmental Representative (DR) extensively referring to the observations of the Assessing Officer in the assessment orders and submitted that the Assessing Officer has made out a strong case to establish on record that the transactions relate to penny stock. Thus, he submitted, the additions made by the Assessing Officer should be confirmed.
10. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. A reading of the impugned assessment orders reveal that the foundation of the additions is based on the report of the Investigation Wing, Kolkata report. Of course, in course of assessment proceeding, the Assessing Officer has conducted independent enquiry by issuing notices u/s. 133(6) of the Act to persons/entities, who purchased shares from the assessee. However, no positive response has come from them. Be that as it may, facts on record reveal that though the assessee purchase the shares on preferential basis, however, the assessee had explained that he was advised to purchase the shares by a friend and the share transactions were through Demat accounts. In this context, it is relevant to look at the statement relied upon by the Assessing Officer. In the statement recorded from Shri Anil Prakash Chand Sanklecha ex-Director of M/s. Lifeline Drugs and Pharma Ltd., in response to a query, he did admit of having known the assessee. He has also stated that the assessee has come and enquired about the shares of the company. Further, in response to the query of the Assessing Officer regarding the mode and manner of allotment ofpreferential shares, he has stated that the list of applicants are sent to BSE, Mumbai and BSE decides it. Meaning thereby, the allotment of preferential shares is with concurrence of BSE. It is also a fact that Lifeline Drugs and Pharma Ltd. is listed with BSE. The entire transactions of purchase and sale shares have happened in BSE platform through SEBI registered stock brokers. The requisite documentary evidences supporting the share transactions have been furnished by the assessee before the Departmental Authorities. No deficiency in such evidences have been pointed out by the Departmental Authorities.
11. In such circumstances, it requires consideration whether the share transactions can be held to be non-genuine. In this context, it is relevant to observe that the fact that assessee is a regular investor in shares and has undertaken share transactions is evident from the materials on record. Even, in the assessment years under dispute, the assessee had sold shares of various other companies and the Assessing Officer has not found them doubtful. Only in respect of shares of Lifeline Drugs and Pharma Ltd. the Assessing Officer has raised doubt. The primary reason for entertaining such doubt appears to be the Investigation Wing report and the fact that BSE suspended transaction in shares of the company in August, 2015. However, facts on record reveal that such suspension was for temporary period and subsequently transaction in shares had taken place. In this context, the following observations of the Coordinate Bench in case of Smt. Ritu Jain vs. ACIT (Supra) would be relevant:
“18. It can be seen that during the F.Y. 2014-15, the assessee has earned short term capital gain of Rs. 79.72 lakhs and long term capital gain of Rs. 6.22 crores. However, the Assessing Officer chose only one scrip out of several, and came to the conclusion that the long term capital gain on sale of shares of LDPL is bogus. However, the Assessing Officer accepted the transactions in respect of short term capital gain and balance long term capital gain.
19. A perusal of the assessment order clearly shows that nowhere the Assessing Officer has made any adverse comment in respect of habitual investments made by the assessee. On the contrary, he has accepted all the transactions other than those of LDPL.
20. Section 142(2) provides that for the purpose of obtaining full information in respect of income or loss of any person, the Assessing Officer may make such enquiry as he considers necessary and u/s 142(3) it is provided that the assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any enquiry under sub section (2) and in section 143(3) of the Act it is provided that after hearing such evidence, as the assessee may produce and such other evidence as the Assessing Officer may require on specified points and after taking into account all relevant material which he has gathered, the Assessing Officer shall make an assessment on the total income or loss of the assessee.
21. A conspectus reading of all these relevant provisions of the Act show that initial burden is upon the assessee to justify his returned income and if some evidences have been gathered by the Assessing Officer, it is the duty of the Assessing Officer to confront those evidences to the assessee and seek explanation from him.
22. In the instant case, in justification of his return of income, the assessee furnished all the necessary documentary evidences to discharge the initial burden cast upon him. The Assessing Officer simply rubbished all the documentary evidences by referring to the general observations and modus operandi of the entry operators and further supporting his observations by report of the Investigation Wing.
23. It would not be out of place to mention here that LDPL, now known as Arihant Multi Commercial Ltd, is not a paper company nor a shell company. In F.Y. 2013-14, the Revenue from operations were at Rs. 40,85,02,313/- and total assets were at Rs. 32,79,07,684/- which included investment, trade receivables, cash and cash equivalent, short term loans and advances and tangible assets. The share capital and reserves and surplus were at Rs. 3,62,40,000/- and Rs. 17,65,16,912/-respectively. Trade payables were at Rs. 10,80,74,165/-.
24. These financials go to show that LDPL is not a shell company. SEBI has suspended trading in shares of LDPL w.ef 28.08.2015 whereas the assessee has sold shares from May 2014 to December 2014, many months before suspension of the scrip. It is not the case of the Assessing Officer, nor there is any evidence on record to show that SEBI has declared all transactions done in scrip of LDPL prior to the suspension as null and void. It is a matter of fact that SEBI looks into irregular movements in share prices and warns investors against any such unusual increase in share price. No such warning was issued by SEBI. The Assessing Officer has failed to produce any material/evidence to dislodge or controvert the genuineness of conclusive documentary evidences produced by the assessee in support of his claim considering the fact that he is a genuine investor and is from past many years, as explained elsewhere.
25. Surprisingly, neither the assessee nor his brokers are named as illegitimate beneficiaries to bogus long term capital gain in any of the alleged statements of the operators/broker or reports/orders of the SEBI or the Investigation Wing. In our considered view, additions made by the Assessing Officer and confirmed by the ld. CIT(A) are heavily guided by surmises, conjectures and presumptions and, therefore, have no legs to stand on.
26. It would not be out of place to refer to the decision of the Hon’ble Supreme Court in the case of Adamine Construction Pvt Ltd [2018] 99 taxmann 45 wherein the Hon’ble Supreme Court, while dismissing the appeal, made the following observations:
“What is evident is that the AO went by only the report received and did not make the necessary further enquiries such as into the bank accounts or other particulars available with him but rather received the entire findings on the report, which cannot be considered as primary material. The assessee had discharged the onus initially cast upon it by providing the basic details which were not suitably enquired into by the AO. The assessee had discharged the onus initially cast upon it by providing the basic details which were not suitably enquired into by the AO.”
27. In the case of Odeon Builders Pvt Ltd 110 Taxmann.com 64, the Hon’ble Supreme Court while dismissing the review petition, held as under:
“However, on going through the judgments of the CIT, ITAT and the High Court, we find that on merits a disallowance of Rs.19,39,60,866/- was based solely on third party information, which was not subjected to any further scrutiny. Thus, the ld. CIT(A) allowed the appeal of the assessee stating:
“Thus, the entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant, thus denying opportunity of cross examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques, & VAT Registration of the sellers & their Income Tax Return. In view of the above discussion in totality, the purchases made by the appellant from M/s Padmesh Realtors Pvt. Ltd. is found to be acceptable and the consequent disallowance resulting in addition to income made for Rs. 19,39,60,866/-, is directed to be deleted.”
4. The ITAT by its judgment dated 16th May, 2014 relied on the self-same reasoning and dismissed the appeal of the revenue. Likewise, the High Court by the impugned judgment dated 5th July, 2017, affirmed the judgments of the CIT and ITAT as concurrent factual findings, which have not been shown to be perverse and, therefore, dismissed the appeal stating that no substantial question of law arises from the impugned order of the ITAT.
5. In these circumstances, the Review Petitions are dismissed.”
6. On identical set of facts, the coordinate bench in the case of Deepak Nagar 73 ITR [Trib] 74 has allowed the appeal of the assessee. The relevant findings of the coordinate bench read as under:
“22. For the sake of repetition, the entire assessment has been framed by the Assessing Officer without conducting any enquiry from the relevant parties or independent source or evidence but has merely relied upon the statements recorded by the INV Wing as well as information received from the INV Wing. It is apparent from the assessment order that the Assessing Officer has not conducted any independent and separate enquiry in this case of the assessee. Even the statement recorded by the INV Wing has not been got confirmed or corroborated by the person during the assessment proceedings. The Assessing Officer ought to have conducted a separate and independent enquiry and any information received from the INV Wing is required to be corroborated and reasserted/reaffirmed during the assessment proceedings by examining the concerned persons who can affirm the statements already recorded by any other authority of the department.
23. There is no dispute that the statement which was relied upon by the Assessing Officer was not recorded by the Assessing Officer in the assessment proceedings but it was pre existing statement recorded by the INV Wing and the same cannot be the sole basis of assessment without conducting proper enquiry and examination during the assessment proceedings itself. In our humble opinion, neither the Assessing Officer conducted any enquiry nor has brought any clinching evidence to disprove the evidences produced by the assessee.
24. Our above view is fortified by the decision of the Hon’ble Delhi High Court in the case of Fair Invest Ltd 357 ITR 146. The relevant findings of the Hon’ble Jurisdictional High Court of Delhi read as under:
“6. This Court has considered the submissions of the parties. In this case the discussion by the CIT(Appeals) would reveal that the assessee has filed documents including certified copies issued by the Registrar of Companies in relation to the share application, affidavits of the Directors, Form 2 filed with the ROC by such applicants confirmations by the applicant for company’s shares, certificates by auditors etc. Unfortunately, the assessing officer chose to base himself merely on the general inference to be drawn from the reading of the investigation report and the statement of Mr. Mahesh Garg. To elevate the inference which can be drawn on the basis of reading of such material into judicial conclusions would be improper, more so when the assessee produced material. The least that the assessing officer ought to have done was to enquire into the matter by, if necessary, invoking his powers under Section 131 summoning the share applicants or directors. No effort was made in that regard. In the absence of any such finding that the material disclosed was untrustworthy or lacked credibility the assessing officer merely concluded on the basis of enquiry report, which collected certain facts and the statements of Mr. Mahesh Garg that the income sought to be added fell within the description of Section 68.”
25. Considering the vortex of evidences, we are of the considered view that the assessee has successfully discharged the onus cast upon him by provisions of section 68 of the Act and as mentioned elsewhere, such discharge of onus is purely a question of fact and therefore, the judicial decisions relied upon by the ld. DR would do no good on the peculiar plethora of evidences in respect of the facts of the case in hand. We, accordingly, direct the Assessing Officer to accept the LTCG of Rs. 11,93,55,564/- declared as such.
26. Since we have accepted the genuineness of the LTCG, we do not find any merit in the consequential addition of Rs. 6,05,312/- and the same is also directed to be deleted.
29. . n his written submissions, the Id. DR has referred to various judgments and heavily relied upon the decision of the Hon’ble High Court of Delhi in the case of Suman Poddar v. ITO [2019] 112 com 330/[2020] 268 Taxman 320 and in the case of Udit Kalra v. ITO [IT Appeal No. 220 of 2019, dated 8-3-2019] and several other decisions of the coordinate bench.
30. We have given thoughtful consideration to the orders of the authorities below and have carefully perused the judicial decisions relied upon by the Id. DR. We find that in all those cases, either the assessee entered into solitary transaction resulting into long term capital gain or prior to the solitary transaction, the assessee was neither engaged in the purchase and sale of shares nor subsequent to earning of long term capital gain, the assessee was found to be engaged in the purchase and sale of shares. These facts are clearly distinguishable from the facts of the case in hand. As mentioned elsewhere, the assessee is a habitual investor having portfolio of investment in shares in crores and is still holding investment in shares in several crores and is constantly”
12. Identical view was expressed by the Coordinate Bench in case of Anoop Jain vs. ACIT (Supra). Thus, there is parity of facts between the assessee’s case and the cases decided by the Coordinate Bench, as referred to above. Therefore, respectfully following the decisions of the Coordinate Bench, we hold that the share transactions cannot be held as non-genuine/bogus. Accordingly, we direct the Assessing Officer to delete the additions. Since we have deleted the additions made by the Assessing Officer treating the share transactions as non-genuine, the additions made on account of alleged commission payment deserve to be deleted. Accordingly, we do so.
13. In the result, assessee’s appeals are allowed and Revenue’s appeal having become infructuous, is dismissed.
Order pronounced in the open court on 25/03/2026.
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