Bogus LTCG Addition Sustained as Tribunal Finds Evidence of Fabricated Share Purchase Records

Dinesh Kumar (HUF) Vs ITO (ITAT Delhi)

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) partly allowed the appeal filed by the assessee for Assessment Year 2015-16 against the order of the Commissioner of Income Tax (Appeals), Ghaziabad. The assessee had filed a return declaring income of Rs.2,52,060 and claimed exemption under Section 10(38) of the Income-tax Act on long-term capital gains (LTCG) amounting to Rs.28,59,645 arising from the sale of shares of M/s CCL International Ltd. The assessee had stated that 12,500 shares of the company were purchased in physical form on 17 August 2011 through M/s Narayan Securities for Rs.1,25,000 in cash. The shares were subsequently transferred in the assessee’s name, dematerialised, and 8,600 shares were sold during the relevant period for Rs.29,69,600 through stock exchange transactions.

During assessment proceedings, the Assessing Officer (AO) treated the share transactions as part of an accommodation entry scheme involving bogus LTCG generated through manipulation of penny stock prices. The AO observed that the original purchase had been made in physical form, payment had been made in cash, and the broker involved could not be traced at the address provided. The assessee was repeatedly asked to produce the Karta for examination, but the Karta did not appear. The AO also analysed the steep increase in the share price and concluded that it lacked support from the company’s financial fundamentals. Consequently, the exemption claimed under Section 10(38) was denied, and the sale proceeds of Rs.29,69,600 were added under Section 69 read with Section 115BBE of the Act. In addition, an amount of Rs.40,00,000 claimed as loans was added under Section 68 as unexplained cash credits.

The CIT(A) affirmed the additions after identifying several discrepancies in the evidence produced by the assessee. It was noted that the purchase documents relied upon by the assessee contained inconsistencies. The sale note dated 22 August 2011 issued by M/s Narayan Securities before the CIT(A) was in the name of another individual, while a document bearing the same details was produced before the Tribunal in the name of the assessee. Similar inconsistencies were found in payment receipts submitted as proof of purchase. The CIT(A) further observed that the share certificates in question had been issued to the original shareholders on 19 August 2011, whereas the assessee claimed to have purchased those shares on 17 August 2011, indicating that the purported sellers did not hold title to the shares on the date of the alleged transaction. The CIT(A) also noted the absence of evidence justifying the purchase price, lack of satisfactory proof of holding the shares for more than one year, and the fact that the purchase of shares in a listed company had taken place outside the recognised stock exchange mechanism.

Before the Tribunal, the assessee relied upon various judicial precedents and argued that documentary evidence such as purchase bills, transfer letters, demat statements, contract notes, broker ledger accounts, and bank records had been furnished. It was also contended that the addition under Section 69 was legally unsustainable because the case involved receipt of money rather than unexplained investment. The Revenue supported the orders of the lower authorities.

FULL TEXT OF THE ORDER OF ITAT DELHI

The above captioned appeal is preferred by the assessee against the orders dated 31.10.2018, by Ld. CIT(A), Ghaziabad, u/s 250 of the Income Tax Act, 1961 [hereinafter referred to as, “Act”] for A.Y. 2015­16.

2. The assessee has raised following grounds of appeal:

“1. Because, the order of learned lower authority is bad in law & against the facts and circumstances of the case and hence is unsustainable.

2. Because, Id. CIT(A), grossly erred in law in sustaining the addition of Rs. 2969600/-, being the amount received against sale of shares u/s 69 of the Act as unexplained investment while neither said amount is any investment of assessee nor source of said amount is under doubt and hence addition is beyond the scope of provision.

3. Because, on merits Id C.LT (Appeals) has erred in sustaining an addition of Rs. 2969600/- against claim of exemption u/s. 10(38) for Rs. 2859645/-earned on said sale of listed equity shares held in physical form duly !fa. and thereafter dematerialized in d-mat a/c, sold electronically through stock exchange, suffered STT, consideration is recd. through banking channel which is duly supported with contract note etc. and all the possible evidences without even allowing cost of acquisition and changing head of income while none of the evidences are rejected.

4. Because, Id. CIT(A) further failed to appreciate that,

a. Neither anybody transaction bogus as specifically charged there is nor material/evidence against the transaction any

b. Addition is based on surmises and conjectures based upon enquiry on some unrelated parties with ref to general modus operandi.

c. No material is ever supplied / confronted.

d. Cases of CCL International Ltd. are accepted u/s 143(3) and revenue is generally accepting dealing in said script with identical facts.

5. Because Ld. CIT(A) grossly erred in sustaining addition of Rs. 40,00,000/-u/s 68 of the Act, being loan of Rs. 20,00,000/- Rs. 9,15,000/-, and Rs. 10,85,000/- against the provisions itself in as much as admittedly assessee is not maintaining books of accounts.

6. Because Ld. CIT(A) failed to appreciate the material placed on the record and summarily sustained the additions without considering the relevant material placed before her wrongly as assessee had fully discharged onus lay upon him.

7. Therefore, total addition of Rs. 6969600/- is prayed to be quashed.

3. Brief fact is that the assessee filed his return of income electronically on 28.8.2015 declaring an income of Rs.2,52,060/-. The case was selected for scrutiny through CASS and notice u/s 143(2) was issued on 27.7.2016 and served. The assessee has declared income from commission and other sources. The assessee further claimed deduction of Rs 28,59,645/- u/s 10(38) on sale of shares of M/s CCL International Ltd.

4. In the course of assessment proceedings, the AO found that the assessee has claimed to have purchased 12500 shares of M/s CCL International Ltd on 17.8.2011, offline through broker M/s Narayan Securities, (Prop. Shri Om Narayan Sharma) vide Bill No. Nil dated 22.8.2011. The payment of Rs. 1,25,000/-, at an average price of Rs 10 per share, was made in cash. These shares were transferred in assessee’s name by RTA Agent M/s Alankit Assignment Limited, Delhi on 16.8.2012 and was dematerialised in his DEMAT A/c with Trustline Securities Ltd., Noida on 21.11.2012.

5. Out of 12500 shares, 8600 shares were claimed to have been sold on various dates on 3.4.2014, 24.9.2014, and 15.1.2015 for Rs.29,69,600/- i.e. at a range of Rs 178/- to Rs 496/- which works out to an average sale rate of Rs. 345.30 per share. The long term capital gain arising thereon of Rs. 28,59,645/- was claimed as exempt from taxation u/s 10 (38) of the Act.

6. The AO found that the entire purchase and sale of shares of M/s CCL International Ltd as a part of a scheme wherein accommodation entries were taken/provided for bogus LTCG through manipulation of stock market. The purchase of shares in physical form, consideration paid in cash, raised the AO’s suspicion who made enquiries with the assessee with respect to genuineness of the LTCG. The assessee was given several opportunities for examining the Karta of the assessee but the Karta always avoided the examination. The AO further issued notice to the broker M/s Narayan Securities, Sikandrabad who was found to be non-existent at the given address. The AO made detailed analysis of prices of the above said shares of M/s CCL International Ltd and found that unprecedented increase in prices were not backed by any financial fundamentals. Considering all the above factors, the AO disallowed the exemption u/s 10(38) and added the amount of Rs 29,69,600/- credited by the assessee out of the purported share sale receipts u/s 69 r.w 115BBE of the Act.

7. Further, the AO found that the assessee could not explain the loan of Rs 40,00,000/- and added the same as unexplained cash credit u/s 68 of the Act.

8. On appeal, the CIT(A) found that no sale bill in the name of the assessee was ever issued by M/s Narayan Securities for purchase of shares. The purchase was made in cash and the sale note dt. 22.08.2011 was issued by M/s Narayan Securities in the name of Shri Gaurav Goel. Further, the CIT(A) found that sale note has been issued on 22.08.2011 acknowledging date of transaction of purchase of shares by the assessee to be 17.08.2011. The CIT(A) also found that shares, in question, were issued to the seller (Manu Bathla 2500 shares; Gupta Umesh Kumar 2500 shares; Rivi Banerjee 5000 shares; and Ayub Khan 2500 shares) on 19.08.2011 meaning thereby the transaction of purchase of shares by the assessee have been entered into prior to issue of share certificate to the seller of these shares.

9. The CIT(A) also found that no evidence in support of genuineness of purchase of shares and justification of purchase price of share and evidence of holding them for more than one year was furnished by the assessee. The CIT(A) held that since the shares of M/s CCL International Ltd. were found to be one of the penny stocks involving manipulation of share market, even noted by SEBI and were found to be sham by DIT Investigation, Kolkata, and since the appellant has invested in these shares, the burden of proof and the onus of proving genuineness of transactions was not discharged by the assessee to substantiate genuineness of alleged share transactions in respect of long term capital gain u/s 10(38).

10. The CIT(A) also observed that on the one hand the assessee claims the company M/s CCL International Ltd. is a listed company, yet the shares of the same have been purchased without routing the transactions through any of the stock exchanges. The CIT(A) found that the payment for purchase of shares has been made much after the date of purchase and no evidence in support of price for purchase of shares of M/s CCL International Ltd. has been given by the assessee. The CIT(A) also noted that though the assessee has been harping upon the sale made through recognized stock exchange through a broker, yet no similar details in respect of purchase was furnished by the assessee.

11. The Id counsel of the assessee, before us, argued that Revenue has accepted LTCG with identical facts/allegation in the questioned Script in many cases. Further several evidences of Sale/purchase such as purchase bill; receipt of payment; share transfer letter; copy of share certificate; contract note of sale of shares; D-mat a/c; assessee’s account in ledger of broker and bank a/c was furnished before the lower authorities. The Id AR argued that the evidences have not been found defective and there is no material against the assessee or transaction. There is no allegation/statement of any against transaction/script. No Allegation by SEBI. Issue is covered by various decision of various high courts/tribunals.

• PCIT V Smt. Krishna Devi 431 ITR 361(DEL)
• Pr. CIT vs. Prempal Gandhi ITA No. 95 of 2017 dated 18.01.18 (PEtH)
• CIT vs. Sudeep Goenka (2013) 29 com 402 (ALL)
• Smt. Karuna Garg–ITA No.1069/2019 (DEL-A)- dt. 06.08.2019
• Swati Luthra [2020] 115 com 167 (Delhi – Trib.)

12. The Id AR challenged the order that addition made u/s 69 is beyond the scope of provision as transaction is of receipt of money and not of any investment, thus could have been added only u/s 69A. The Id AR relied on the following:

• Smt. Sarika Jain vs. CIT – 407 ITR 254(ALL)
• Vijay Kumar V ITO-ITA 2483/2015-Order dt. 27.11.18(DEL-F)
• Inder Singh V ITO-ITA 1931/2016 -order dt. 5.12.18(DEL-B)
• Shanta Devi V Cit (1987) 171 ITR 532 (PEtH)
• Jitendra Kumar Yadav – ITA NO. 1808/D/2016 (Del-F)

13. The Id AR further relied on the following where with identical facts case is squarely covered by various co-ordinate benches of hon’ble ITAT allowing claim u/s 10(38) by holding script genuine and not penny stock:

• Sarika Bindal V ITO Ward -1999/D/2020
• Reeshu Goel V ITO -1691/D/2019
• Mukta Gupta/Mohan lal V ITO-2766-2767/D/2018
• Anchal Gupta/ v ITO -501-504/2019/LKW/2019
• Gaurav Goel V ITO -369/2019

14. The Id AR argued that rejection of claim without supplying material relied upon and providing opportunity to cross examine is against the settled law. Onus on revenue to prove that apparent is not real and material not shown to assessee can’t be used in evidence.

• Cit V. Daulatram Rawatmull 87 ITR 349 (SC)
• Kishan Chand Chellaram (1980) 125 ITR 713 (SC)
• CIT V Odeon Builders (P.) Ltd [2019] 110 com 64 (SC)

15. Per contra, the Id DR heavily relied on the orders of the AO and the CIT(A).

16. We have heard the rival submissions and have perused the materials on record. We find that the assessee has purchased 12500 shares of M/s CCL International Ltd on 17.8.2011, in physical form and in cash. Out of 12500 shares, 8600 shares were claimed to have been sold in FY 2014-15, at average rate of Rs. 345.30 per share for total consideration of Rs.29,69,600/-. The assessee claimed Rs. 28,59,645/-as exempt long term capital gain u/s 10 (38) of the Act. In such facts and circumstances, we are called upon to adjudicate upon the issue of the genuineness of LTGC claim including purchase of shares of M/s CCL International Ltd by the assessee.

17. The assessee has furnished before us documents relating to purchase of shares and plethora of case laws in favour of assessee for claim of LTCG. With regard to purchase of shares of M/s CCL International Ltd, we first notice, from the perusal of the orders of the CIT(A) and the assessee’s submission, that the purported purchase of shares of M/s CCL International Ltd was made by the assessee in physical form and the payment for the same is made in cash and not through regular banking channel. From the explanation furnished by the assessee, we find the following details which are not adequately and satisfactorily addressed by the assessee:

i) We find from the documents and evidences filed by the assessee with regard to purchase of shares of M/s CCL International Ltd, that the shareholders (Manu Bathla; Gupta Umesh Kumar; Rivi Banerjee; and Ayub Khan) of the aforesaid shares, themselves received the shares certificate of M/s CCL International Ltd, on 19.08.2011. Whereas the date of transaction recorded by the broker Narayan Securities, for sale of said shares to the assessee, is 17.08.2011 i.e., two days prior to the ownership of shares by the original shareholder.

ii) The sale note of the broker Narayan Securities dated 22.08.2011 before the CIT(A), is in the name of Gaurav Goel, with address J-58, Nehru Nagar-II, Ghaziabad, Uttar Pradesh-201001 while the assessee produced before us the same sale note of Narayan Securities dated 22.08.2011 but in the name of Dinesh Kumar(HUF), with the same address J-58, Nehru Nagar-II, Ghaziabad, Uttar Pradesh-201001. We have reproduced the two ‘sale note’ for ready reference below:

—

iii) Similarly, we note that the assessee, as a proof of purchase, submitted before the lower authorities, a payment receipt from the broker Narayan Securities, of Rs 1,25,000/- dated 17.08.2011 in the name of Gaurav Goel, the person to whom the sale note was issued. The said payment receipt, submitted before us, however shows the name of Dinesh Kumar (HUF) with same amount of Rs 1,25,000/- and same date 17.08.2011.

iv) The AO made enquiries with respect to whereabouts of the broker M/s Narayan Securities by issuance of notice u/s 131 of the Act and found that the broker does not exist on the given address. The AO further noted that the PIN code of the Sikandrabad, the address on which M/s Narayan Securities was located, is 203205 whereas the PIN code in the sale note of the M/s Narayan Securities is given as 203001 which is that of Bulandshahr.

v) The CIT(A) has given a finding of fact, which is also reflected from the documents/evidence submitted before us, that the purchase of shares of M/s CCL International Ltd by the assessee have been entered into a date prior to the date on which the shareholder was issued the share certificates. The transaction of sale was entered into by the assessee was 17.08.2011 whereas the share certificate was issued to the shareholder, who were selling the shares, on 19.08.2011.

vi) There is no evidence in support of price for purchase of shares of M/s CCL International Ltd. has been given by the assessee and no evidence of holding them for more than one year was furnished by the assessee.

vii) We find that the CIT(A) has pointed out that though the assessee claims the company M/s CCL International Ltd. is a listed company, yet there is no explanation as to how and why the shares of the same have been purchased without routing the transactions through any of the stock exchanges. We also note that the assessee has emphasised that the sale is made through recognized stock exchange through a broker, yet no similar details in respect of purchase was furnished by the assessee.

viii) The AO’s several attempt to examine the Karta of the assessee, regarding the purchase/sale of shares of M/s CCL International Ltd in person, remained uncompiled.

18. In the above factual matrix of the instant case, we find that the entire enquiry by the Assessing Officer revolved around the genuineness of claim of Long Term Capital Gain from sale of shares. Evidences collected by the AO and the CIT(A), described above, fairly leads to conclusion that the purchase of shares is a result of manipulation and fabrication of purchase documents, and therefore bogus. It would be fair to say that the assessee is one of the participants of organised scam of evasion of tax by way of bogus LTCG. The burden of proof and the onus of proving genuineness of share transactions, in respect of long term capital gain u/s 10(38) of the Act, was upon the assessee which in the instant case has not been satisfactorily discharged by the assessee. In the above factual matrix of the instant case, we reiterate that the purchase of shares in physical form and the payment being made in cash, non-existent broker, coupled with the fact of manipulation and fabrication of purchase documents, establishes that the purchase of shares of M/s CCL International Ltd itself was not genuine and assessee is one of beneficiaries of accommodation entry receipts in form of long term capital gains. Once we consider the genuineness of purchase of shares of M/s CCL International Ltd, as not established, the capital gain earned from the sale transaction of the same shares cannot be lent credence to. We refer to the decisions of hon’ble Supreme Court in thew case of Sumati Dayal v CIT (1995) 214 ITR 801(SC) and CIT Versus Durga Prasad More (1971) 82 ITR 540 and the decision of hon’ble Delhi High Court Udit KaIra ITA 220/2009 and Suman Poddar (2019) 112 taxmann.com 330(SC) dismissing the SLP arising out of the decision of Hon’ble Delhi High Court in the case of Suman Poddar (2019) 112 taxmann.com 329(Del). Consequently, there is no interference called for in the decision of the CIT(A). Ground 1 to 4 is dismissed.

19. As far as the reliance of the assessee on several case, we find that the peculiar facts of the instant case distinguishes itself from the facts of the plethora of case laws relied upon by the assessee. In the case of Sarika Bindal V ITO (supra); Reeshu Goel V ITO (supra); Mukta Gupta (supra), relied upon, the purchase of shares were made through banking channel and there was no discrepancy found in the sale notes. In Gaurav Goel V ITO (supra), the purchase payment was made from disclosed source of income and no discrepancy found in the sale notes. In the instant case purchase of share are in cash, in offline mode and the sale note of the shares and payment receipts for the shares, from a non-existent broker, are manifestly manipulated/fabricated.

20. The assessee’s technical objection that wrong Section 69 was invoked, whereas the transaction being receipt of money and not of any investment, therefore could have been added u/s 69A, is rejected. It is a settled principle of law that the mere mention of a wrong section is not fatal to the assessment nor it invalidates addition if substance and intent of the order is unambiguous so long as the power to tax exists or the ingredients of the correct provision are satisfied and the Assessee was fully cognizant of the nature of the inquiry. Reference is made to the hon’ble Supreme Court decision of Pruthvirajsinh Nodhubha Jadeja (D) By LRs. v. Jayeshkumar Chhakaddas Shah (2019).

21. With respect to ground no 5 and 6 regarding addition of loans added as unexplained cash credits u/s 68 of the Act, the assessee has filed additional documents/evidences to explain the cash credits. We find that the assessee has now filed the details of parties such as their ITRs, Balance sheets and bank statements of the lenders. In such a situation, we find it appropriate to set aside the issue of genuineness of loans to the file of the CIT(A) for a fresh adjudication. The ground 5 and 6 are allowed for statistical purposes.

22. In the result, the appeal of the assessee in ITA 368 /Del/2019 is partly allowed.

Order pronounced in the Open Court on 28.04.2026.