Case Law Details
ITO Vs Mayukh Construction Private Limited (ITAT Kolkata)
ITAT Rejects Revenue Appeal Because BSE Confirmed Penny Stock Transactions; Penny Stock Loss Held Genuine Due to Demat Records and Broker Documents; ITAT Relies on SAT Findings to Delete Addition in India Infotech Share Loss Case.
The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) dismissed the Revenue’s appeal and upheld the order of the Commissioner of Income Tax (Appeals) deleting an addition of Rs.72,28,366 made by the Assessing Officer (AO) on account of alleged bogus loss arising from transactions in shares of India Infotech and Software Ltd.
The assessee had filed its return of income for AY 2014-15 declaring income of Rs.7,30,390. The assessment was reopened under Sections 147 and 148 after the AO received information that the assessee was allegedly a beneficiary of accommodation entries in the form of bogus long-term capital loss involving penny stock transactions in India Infotech and Software Ltd. The AO treated the company as a manipulated penny stock and concluded that the assessee had claimed a bogus loss of Rs.72,28,366 from sale of the shares.
During the assessment proceedings, the assessee submitted replies to all notices and furnished supporting documents relating to the purchase and sale of shares. The assessee, a non-banking finance company engaged in share trading activities, had purchased 2,49,100 shares of India Infotech and Software Ltd. for Rs.93,92,490 and later sold them for Rs.21,64,124, thereby incurring the loss in dispute. The AO also issued notice under Section 133(6) to the Bombay Stock Exchange, which confirmed the details of the transactions.
The CIT(A) deleted the addition after noting that the assessee was a regular participant in share trading and had furnished all relevant evidence including purchase and sale ledgers, broker accounts, contract notes, demat records, and bank statements. The appellate authority held that the transactions could not be treated as bogus merely because the shares were categorized as penny stock.
Before the Tribunal, the assessee relied on an order of the Securities Appellate Tribunal (SAT) in the case concerning India Infotech and Software Ltd. The SAT had observed that investigations did not establish diversion or misappropriation of funds, manipulation in the price of the scrip, disproportionate gain, or unfair advantage to any person. The SAT further noted that the company was not found to be a shell company and reduced or set aside penalties imposed in related proceedings.
The ITAT observed that the assessee had produced all documentary evidence relating to the transactions, including contract notes, broker statements, demat records, and bank details. The Tribunal also noted that the Bombay Stock Exchange had independently confirmed the transactions in response to the AO’s notice under Section 133(6).
The Tribunal relied on the SAT findings that there was no manipulation in the price of the scrip and no unfair advantage or disproportionate gain caused to anyone. It further referred to earlier Tribunal decisions, including Braten Mandal v. ITO and Gateway Financial Services Ltd. v. ACIT, where additions based on alleged penny stock transactions were deleted in the absence of direct evidence connecting the assessee with any manipulation or accommodation entry arrangement.
The ITAT noted that the assessee’s transactions were carried out through a recognized stock broker and reflected in demat and banking records. It also observed that no direct evidence had been brought on record to show that the assessee had colluded with any person involved in manipulation of share prices. Statements relied upon by the investigation authorities were also not confronted to the assessee.
The Tribunal further observed that if the assessee intended to generate bogus gains or losses, the shares would have been sold at the peak market price rather than at prices ranging between Rs.19 and Rs.22 per share when the stock had previously reached much higher levels.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal filed by the revenue arises from order dated 20.11.2025, passed u/s 250 of the Income Tax Act, 1961 (hereafter referred to as “the Act”) by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the Ld.CIT(A)] for AY 2014-15.
2. The only issue raised the revenue against the order of Ld. CIT(A) deleted the addition of Rs. 72,28,366/- as made by the AO in the bogus loss in the form of accommodation entries resulting from Penny stock India Infotech and Software Ltd.
3. The facts in brief are that the assessee filed return of income on 30.09.2024 declaring total income at Rs. 7,30,390/-. The case of the assessee was reopened u/s 147 by issuing notice u/s 148 of the Act on 31.03.2021 after recording reasons to believe u/s 148(2) of the Act after AO received information that the assessee is a beneficiary of accommodation entries in the form of bogus long term capital gain from Penny stock M/S India Infoteh and Software Ltd. which was rigged and manipulated on the stock exchange. The Assessee complied with the notice u/s 148 of the Act by filing return of income on 29.04.2021 declaring same income as shown in ITR filed u/s 139(1) of the Act. Thereafter, statutory notices along with questionnaire were issued to the assessee and the assessee replied all the queries from the A. Pertinent to note that the assessee is engaged in the business of trading in shares. The AO noted that the share ass referred to above is a penny stock. The AO in order to verify the transactions in the said penny stock also issued notice u/s 133(6) of the Act to the Bombay Stock Exchange which was complied with by filing with the details of shares purchased and sold by the assessee during the impugned financial year. Finally, the AO held that that the assessee has taken bogus loss of Rs. 72,28,366/- from the sale of said penny stock and the same was added to the income of the assessee.
4. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee by holding that the assessee is a regular trader in stock market and since the assessee has filed all the documents before the AO concerning the transactions of purchase and sales made in the said stock namely India Infotech and Software Ltd., therefore, the loss cannot be treated as bogus loss by relying on the various decisions as noted by the Ld. CIT(A) on page no. 8, 9 and 10 of the appellate order. The Ld. CIT(A) held that the assessee is non banking Finance Company and is engaged in the share trading activities. The Ld. CIT(A) noted that the assessee has purchased 249100 shares of India Infotech and Software Ltd. for Rs. 93,92,490/- and these were sold for a consideration of Rs. 21,64,124/- thereby incurring loss of Rs. 72,28,366/-.
5. After hearing the rival submission and perusing the material available on record, undisputedly the facts of the case are that the assessee is a trader in Bombay Stock Exchange. During the year assessee has purchased the shares of India Infotech and Software Ltd. which were sold also thereby incurring loss of Rs. 72,28,366/-. The assessee has filed all the documents/details comprising all the evidences concerning the said stock such as copies of purchase and sales ledger , copy of broker account, copies of contract notes for purchase and sales and bank statement etc the AO as well as the Ld.CIT(A). We note that BSE has also confirmed these transactions in communication which was in compliance of notice issued u/s 133(6) of the Act by the AO. We note that during the course of hearing, the assessee placed before us the order of Security Appellate Tribunal in the case of Infotech India & Software Ltd. Vs. Security & Exchange Board of India (SEBI) dated 04.01.2023 in appeal No. 950 of 2022 and others, wherein the Security Appellate Tribunal, Mumbai has been given the following finding:
“7. We also find that the entire enquiry was initiated with regard to the allegation that the Company was a shell Company which fact was found to be false. Further, the AO has given a clear finding that there was no violation of the PFUTP Regulations and there was no diversion of funds nor there was any manipulation in the price of the scrip and, consequently, no fraud or unfair advantage was caused to any shareholder or investor. In the absence of any specific loss being caused to anyone it was contended that the penalty imposed in the given circumstances was totally disproportionate to the alleged violation apart from being harsh and excessive.
8. Admittedly, a clear finding has been given by AO that there is no misappropriation of funds of the Company nor there is any manipulation in the price of the scrip.
9. In the absence of any finding of misappropriation of funds or diversion of funds, we are of the opinion that the penalty for the said violation appears to be harsh and excessive.
10. We find that no disproportionate gain was caused to anyone nor created any unfair advantage to the appellants nor any specific loss was caused to any investors and, therefore, in our opinion the direction for imposition of penalty appears to be harsh and excessive.
11. In Suzlon Energy Limited &Anr. vs. SEBI in Appeal No. 201 of 2018 decided on May 03, 2021 we have held that the penalty under Section 23E of the SCRA Act cannot be imposed for violation of listing conditions. This judgement has not as yet been set aside by a higher court and is therefore binding on SEBI inspite of which we find that that penalty of Rs. 5 lakhs has been imposed under Section 23E of the Securities Contracts (Regulation) Act 1956 (“SCRA Act” for convenience) against the Company Indian Infotech and Software Ltd. Thus, the penalty of Rs. 5 lakhs imposed under the said is totally erroneous.
12. We may add that the decision of this Tribunal in Suzlon (supra) is binding on the AO and is required to be followed. The mere fact that SEBI has filed an appeal before the Supreme Court is not sufficient for the AO not to give effect to the order of the Tribunal in Suzlon’s case. While disposing off quasi-judicial matters, the AO is bound by the decision of the appellate Tribunal. The principle of judicial discipline requires that the order of the Tribunal should be followed unreservedly by the AO. Non-compliance of orders of the Tribunal has resulted in undue harassment to the litigant. In this regard, the Supreme Court in Union Of India And Ors. vs. Kamlakshi Finance Corporation Ltd. 1992 Supp (1) Supreme Court Cases 648 held:
“The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not “acceptable” to the department in itself an objectionable phrase and is the subject matteran appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.”
13. Varsha Poddar and Harish Joshi were non-executive independent directors. They were not involved in the day to day affairs and management of the Company and are therefore not concerned with the alleged misrepresentation of the financials. Merely because they were part of the audit committee does not mean that the appellants were aware of the misrepresentation being made by the Company. The imposition of penalty upon them is wholly erroneous. In view of various decisions passed by this Tribunal which has been noted in the impugned order but not considered.
14. We also find that the imposition of penalty on the other directors is harsh and excessive.
15. Considering the aforesaid, while affirming the violation committed by the Company, we reduce the penalties as follows:-
(i) Indian Infotech and Software Ltd.- Rs. 5 lakhs.
(ii) Kamal Nayan Sharma- Rs. 5 lakhs.
(iii) Mukund Bhardwaj- Rs. 4 lakhs.
(iv) The penalty against Varsha Poddar and Harish Joshi are set aside.
16. The aforesaid directions have been issued by the Tribunal in exercise of its powers provided under Rule 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000 to secure the ends of justice. In any case the Supreme Court in SEBI vs. Sunil Krishna Khaitan &Ors. 2022 SCC OnLine SC 862 has held that the Tribunal has plenary powers holding:
90. The appeal before the Appellate Tribunal under Section 15T, is the first appeal against the decision of the Board or the adjudicating officer. First appeal is a continuation or is co-terminus with the proceedings of the original adjudicating authority. The first appeal is a valuable right of the party aggrieved, and all questions of fact and law decided by the Board or the adjudicating authority, including exercise of discretion whether within the law, are open for full consideration and examination. The Appellate Tribunal, in the absence of any limit, has plenary powers in disposing of an appeal. It can do what the Board/ authorities can do and also direct them to do what they have failed to do. Theposition as to the power of the Appellate Tribunal has been appropriately summarized in Swedish Match (supra), wherein it has been held:
“84. It may be true that the Board in its impugned order dated 4-6-2002 proceeded on a wrong premise that having regard to the proviso appended to Regulation 12, Regulation 12 would be attracted. But SAT, in our opinion, rightly construed the provisions of Regulations 11 and 12 in arriving at a finding that Regulation 11 would be attracted and Regulation 12 would not be. The Tribunal was entitled to take a different view of the matter from that of the Board with a view to sustain the ultimate result in the appeal in exercise of its appellate power. Such a power in the appellate court/ tribunal is akin to or analogous to the principles contained in Order 41 Rule 33 of the Code of Civil Procedure. Even otherwise, before us the judgment of the Tribunal is in question, this Court is required to consider the correctness or otherwise of the Tribunal. In any event, the reasoning of the Tribunal shall prevail over the Board.”
In view of the aforesaid, Appeal No. 950 of 2022 Indian Infotech and Software Ltd., Appeal No. 1010 of 2022 KamalNayan Sharma and Appeal No. 1011 of 2022 Mukund Bhardwaj are partly allowed. Appeal No. 951 of 2022 Varsha Poddar and Appeal No. 1009 of 2022 Harish Joshi are allowed. All the misc. applications are disposed of accordingly.
18. In the circumstances of the case, parties shall bear their own costs.
19. This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.”
6. Thus, a perusal of the above decision revealed that the Security Appellate Tribunal has given a finding that said company M/S India Infotech & Software Ltd. Is not a shell company and there was no diversion of funds nor was there no any manipulation in the price of the scrips. The Ld. Tribunal has also held that there is no disproportionate gain to anyone nor created unfair advantage to the assessee nor any specific loss was any investor. Therefore, we are of the view that the loss incurred by the assessee cannot be treated as bogus loss in the hands of the assessee as is clear from the documents furnished before us and also before the AO as well as the Ld.CIT(A). Beside the case is squarely covered by the decision of Braten Mandal Vs. ITO [2024] 167 taxmann.com 637 (Kolkata Tribunal), dated 17.09.2024, wherein the coordinate bench has held as under:
“2.2 We have also gone through the copy of contract note towards sale of the shares which has been field by the assessee in the paper book that goes to show that the average price of the share for this company in January 2022 was around Rs. 10- per share. It is also made clear that SEBI has itself stated in its order that there is no misappropriation of funds of the company nor there is any manipulation in the price of the scrip. SEBI has further held that no disproportionate gain was caused to anyone nor created any unfair advantage to the appellants nor any specific loss was caused to any investor. Now, we have gone through the cited decision and find thus:
That the Hon’ble Gujarat High Court in the case of PCIT v. SangitabenJagdishkumar Shah [2023] [2023] 156 taxmann.com 147 (Gujarat) (Gujarat) (28-88-2023) has held that:-
Where assessee claimed loss on sale of shares of a company which were not blacklisted and not termed as penny stock by SEBI and assesses had also produced relevant documents such as contract note of transactions from broker, copy of trading bills, details of STT paid, and further, all transactions were through banking channels, impugned addition made on account of said loss treating same as bogus could not be sustained That on the identical issue. SLP filed by the revenue department has been dismissed by the Hon’ble Apex Court in the case of PCIT v. Genuine Finance Pvt Ltd 464 ITR 588 (SC) (13/05/2024).
Lastly, reliance is placed upon the decision of Coordinated Bench in the case of M/ s Gateway Financial Services Ltd & Others v. ACTT in ITA No. 982984/ Kol/ 2018 order dated 14/ 07/ 2023 wherein on similar facts, differentiating the issue it has been concluded as below:-
44. Secondly, there is no direct evidence referred to by the assessing officer or in the report of the investigation Wing that the assessee(s) have made arrangements with the entry operators/ company owners for carrying out the alleged transactions Thirdly, additions made by the assessing officer are merely based on a theory called preponderance of probability that in same type of cases prices are rigged up and down by the entry operators in order to provide accommodation entry to various persons in the form of Long term capital gam and though, the assessing authority can apply preponderance of probabilities in some cases on account of surrounding circumstances but so far as the cases on hand are concerned, we notice that firstly some observations were made by the SEBI regarding some fishy transactions carried out in case of few companies. Based on such primary information, the income tax department has carried out extensive enquiries and search and surveys in the case of various entry operators and alleged companies and based on such statements, a theory was established regarding such accommodation/ bogus entries in the form of capital gains. However, since in the case of the assessee. SEBI at a later stage has intensively carried out the investigation on the facts of the asses see (s) along with other persons as referred in the order of the SEBI (extracted supra), and after a detailed investigation and examination of records exonerated, the assessee(s) from the charges levelled in the show cause notice issued to them. Therefore, when the assessee(s) have been exonerated and the charges against them have been waived and the transactions of purchase and sale of equity shares carried out by them have been found to be genuine, the theory of preponderance of probabilities is ruled out in the case of the present assessee(s). Thus, when the transactions giving rise to the long term capital gain have been found to be genuine, and as per rules and regulation of SEBI, the finding of the Id. CIT(A) deserves to be set aside and the impugned additions in case of assessee(s) in appeal before us are uncalled for.”
2.3. Going over the above discussion, we find that the following facts have been arisen from the arguments and the facts of the case:
a. All the transactions of purchase and sale of share of India Infotech and Software Ltd. has been executed through recognized stock broker namely, Kotak Securities Ltd. the purchase and sale of shareare backed by contract notes, the holding of the share is reflected in the demat account. (We have already recorded the inaccuracy in this averment in respect of purchase of shares in para 5.1 above)
b. The transaction of the share are duly recorded in the statement of the account of the assessee
c. The assessee does not have any occasion to collude with any of the person involved in the manipulation of the price of the share of India Infotech and Software Ltd. as the transactions has been executed through recognized stock exchange through recognized and reputed broker. (This averment is also partly incorrect as we have discussed in para 5.1 above)
d. The assessee is regular investor in shares. (Though this fact does not get corroborated by the demat accounts statement submitted by the assessee which apart from the shares of India Infotech and Software Ltd. only reflects insignificant holding of share of ITC Limited)
d. there is no direct evidence brought on record to prove that the long term capital gain claimed by him is on account of colluded transactions
e. Statement of the persons recorded on the basis of which the report was prepared by DDIT Inv. 2 (4) was not confronted to him.”
2.4. While we have gone through the order of the Id. CIT(A), it appears to us that he dismissed the appeal of the assessee thereby saying that the assessee failed to discharge his onus regarding proving of genuineness of the transaction which has led to alleged long-term capital gain. It is apparent that the assessee has brought order of the SEBI before the AO and Id. CIT(A) regarding the genuineness of M/ s. India Infotech and Software Ltd. as held by SEBI and further assessee had proved that transactions of the shares are duly recorded in the statement of account of the assessee. There was nothing before the AO to establish any collision with any of the person involved in the manipulation of the price of share of M/s. India Infotech and Software Ltd. How the AO and Id. CIT(A) come to this conclusion that the assessee could not be able to prove the genuineness of the transaction. It is an undisputed fact that assessee has sold 2,85,000 shares of Mis. India Infotech and Software Ltd. at a price ranging from Rs. 19/- to Rs. 22/ -. The shares were traded through Demat account of the assessee held with Kotak Securities Ltd., a world-wide renowned company. Copy of the contract note towards sale of the shares has also been brought before us and the same was also brought in the notice of Id. CIT(A). It is also important to mention here that the share of this company has gone as Rs. 48.6/-and as such if the assessee was so inclined and involved in receiving bogus capital gains, then the assessee would have sold the shares at the highest pick point and not in the range between Rs. 19/- to Rs. 22/- per share.
7. We, therefore, respectfully following the decision of the coordinate bench which is given on similar facts, uphold the appellate order by dismissing the appeal of the assessee.
8. In the result, the appeal of the revenue is dismissed.
Order pronounced on 06.04.2026
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