Ahmedabad ITAT Upholds Deletion of Bogus LTCG Addition; Independent Enquiry Essential, Mere Investigation Report Insufficient

DCIT Vs Pinkiben Riddheshkumar Bhandari (ITAT Ahmedabad)

Ahmedabad ITAT Upholds Deletion of Bogus LTCG Addition; Independent Enquiry Essential, Mere Investigation Report Insufficient

The Ahmedabad ITAT dismissed the Revenue’s appeal and upheld the deletion of an addition of ₹44.19 lakh made under section 68 in respect of alleged bogus long-term capital gains (LTCG) arising from transactions in the shares of Kushal Tradelink Ltd. While the Tribunal disagreed with the CIT(A)’s findings on the legal validity of the reassessment, it nevertheless sustained the relief on merits, resulting in the Revenue’s appeal being dismissed.

The Tribunal held that the CIT(A) had erred in treating the notice under sections 148/148A as time-barred and in holding that approval ought to have been obtained from the PCCIT instead of the PCIT. It observed that, while computing the limitation period under section 149, the time consumed in proceedings under section 148A has to be excluded, and the same computation also governs the determination of the competent sanctioning authority under section 151. The later amendment to section 151 was held to be clarificatory, supporting this harmonious interpretation.

On merits, however, the Tribunal found no infirmity in the CIT(A)’s conclusion that the Assessing Officer had made the addition without independent application of mind. The assessee had produced contract notes, broker statements, bank statements, demat records and other documentary evidence, proving the genuineness of the share transactions. The Assessing Officer neither conducted any independent enquiry nor confronted the assessee with the Investigation Wing’s material or permitted cross-examination. Instead, the addition was made solely on the basis of the Investigation Wing’s report.

The Tribunal also noted that the Assessing Officer had accepted the short-term capital gain earned by the assessee from the same scrip, yet rejected the long-term capital gain without assigning any convincing reason. It further observed that the assessee’s broker was not implicated in any alleged accommodation entry racket, the scrip was not blacklisted by SEBI at the relevant time, and all sale proceeds had been received through normal banking channels. Since the Revenue failed to produce any cogent evidence to disprove the assessee’s claim, the deletion of the addition was upheld. Accordingly, although the Revenue succeeded on the legal issues, it failed on merits, and the appeal was dismissed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal has been preferred by the Revenue against the order of the learned Commissioner of Income Tax (Appeals), [hereinafter referred to as ‘CIT(A)’] dated 24.02.2025 for the Assessment Year (AY) 2018-19.

2. The Revenue in this appeal has contested the action of the Ld. CIT(A) in deleting the addition of Rs. 44,19,060 /- which was made by the Assessing Officer, (for short, “the AO”) u/s 68 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) treating the long-term capital gains claimed by the Assessee as bogus.

3. The brief facts of the case are that the Assessee had filed her original return of income on 16.07.2018 declaring total income of Rs. 26,37,880/-. Subsequently, the AO received information on Insight portal from Investigation Wing that a search and seizure action was carried out in the case of Kushal Group u/s 132 of the Act on 05.02.2019 and it was found that Kushal Group was engaged in providing accommodation entries in the forms of bogus long-term capital gains (for short, “LTCG”) / short-term capital gains (for short, “STCG”). It was also found that during financial year 2017-18, the Assessee had also traded in the scrips of Kushal Group and Kushal Group, had booked LTCG/STCG of Rs. 44,19,060/-. As per information, the Assessee had entered into fictitious transactions amounting to Rs. 44,19,060/-with Kushal Group and booked bogus loss. Therefore, the AO issued show cause notice u/s 148A(b) which was duly replied by the Assessee.

3.1 The Assessee, in her reply, apart from objecting the reopening of the assessment on legal grounds, further submitted that the Assessee had traded in the scrip of M/s. Kushal Limited in regular course and that the Assessee was not involved in any type of bogus transaction or price rigging, nor was she aware of any such activity done by any other person relating to shares price rigging/bogus transactions in the shares of M/s. Kushal Limited. It was further explained that during the year under consideration, the Assessee had sold 38,000 shares of Kushal Tradelink Limited on 18.04.2017 through the broker ASE Capital Market Pvt. Ltd., which resulted into short-term capital gain of Rs. 59,728/- which was duly offered for taxation in her return of income. Further, that the Assessee sold another lot of 38000 shares of M/s. Kushal Limited on 28.03.2018 which resulted into long term capital gain of Rs. 43,20,210 /- which was claimed as exempt from taxation u/s 10(38) of the Act. The said long term capital gains were duly reflected by the Assessee in her return of income. The Assessee also furnished all the details and documents as required by the AO.

3.2 The AO, however, was not satisfied with the above submission of the Assessee. He, therefore, reopened the assessment u/s 148 of the Income Tax Act by following the due procedure as prescribed u/s 148A of the Income Tax Act and after obtaining the approval of the Principal Commissioner of Income Tax (for short, “PCIT”).

3.3 During the assessment proceedings, the Assessee reiterated that the Assessee had not entered into any bogus transaction, rather the transactions of the Assessee carried out in the scrip of Kushal Limited were genuine and bona fide. It was also submitted that the Assessee had not only traded in the scrip of Kushal Limited but also in shares of various companies and the capital gains/loss incurred in such trading was duly offered for taxation. However, the AO rejected the contentions of the Assessee and made the impugned addition of Rs. 44,19,060/- on account of bogus long term capital gains, sticking to the information as was obtained from the Insight portal.

4. Being aggrieved by the said order of the AO, the Assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), however, vide his impugned order, deleted the addition so made by the AO both on legal grounds as well as on merits. So far as legal ground regarding the validity of the notice issued u/s 148 of the Act was concerned, the Ld. CIT(A) observed that the assessment year involved was AY 2018-19. That the notice u/s 148 was issued on 07.04.2022 and the income escaping the assessment has been alleged to be Rs. 44,19,060/-, which was less than Rs. 50 lakhs. He noted that as per the provisions of Section 149 of the Act as in force during the relevant period, no notice u/s 148 could be issued for the relevant assessment year if three years have elapsed from the end of the relevant assessment year, unless the case falls under Clause (b). Since the case of the Assessee was clearly covered u/s 149(1)(a) of the Act and the three years’ time period from the end of the relevant year expired on 31.03.2022 and the notice was issued on 07.04.2022, the Ld. CIT(A), therefore, held that the same was time barred.

4.1 The Ld. CIT(A), further referred to the provisions of Section 148 of the Act providing that the no notice u/s 148 can be issued without obtaining the prior approval of the specified authority. The Ld. CIT(A) further observed that as per the provisions of Section 151 as in force during the relevant period, the specified authority for the purpose of Section 148 and section 148A was Principal Commissioner of Income Tax, (for short, “PCIT”) if three years or less than three years have elapsed from the end of the relevant assessment year; and it was Principal Chief Commissioner of Income Tax, (for short, “PCCIT”) if more than three years have elapsed from the end of the relevant assessment year. The Ld. CIT(A) observed that since the relevant assessment year in this case was AY 2018-19, and the three year time period had elapsed on 31.03.2022, whereas, the notice was issued u/s 148 of the Income Tax Act on 07.04.2022 after obtaining the prior approval of the PCIT, and since as per the provisions of section 151(ii) of the Act, the competent authority to give approval after the lapse of three years from the end of the relevant assessment year was PCCIT, therefore the order passed u/s 148A(d) and the notice issued u/s 148 of the Act were not valid and liable to be quashed.

4.2 The Ld. CIT(A), therefore, quashed the assessment on the basis of his finding relating to the aforementioned two legal grounds.

5. Thereafter, the Ld. CIT(A) proceeded to decide the case on merits and held that the impugned addition was not warranted even on merits of the case.

6. Being aggrieved by the said order of the Ld. CIT(A), the Revenue has come in appeal before us.

7. We have heard the rival contentions of the Ld. Representatives of the parties and have also gone through the record. So far as the findings of the Ld. CIT(A) on the legal issues relating to the limitation to issue notice u/s 148 of the Act as prescribed u/s 149 of the Act and further relating to the specified authority, the same being PCCIT and not the PCIT, are concerned, we do not agree with the above findings of the Ld. CIT(A). The third and fourth provisos to section 149(1) of the Act as in force with effect from 01.04.2021 and applicable for the relevant period, read as under:

“…Provided also that for the purposes of computing the period of limitation as per this section, the time or extended time allowed to the assessee, as per show-cause notice issued under clause (b) of section 148A or the period during which the proceeding under section 148A is stayed by an order or injunction of any court, shall be excluded:

Provided also that where immediately after the exclusion of the period referred to in the immediately preceding proviso, the period of limitation available to the Assessing Officer for passing an order under clause (d) of section 148A is less than seven days, such remaining period shall be extended to seven days and the period of limitation under this sub-section shall be deemed to be extended accordingly…”

8. The aforesaid provisos perhaps have escaped the attention of the Ld. CIT(A). In the case in hand, the notice u/s 148A(b) of the Act was issued by the AO on 11.03.2022 and reply thereto was filed by the Assessee on 19.03.2022. Under the circumstances, as per the above-reproduced proviso to of section 149(1), the limitation period stopped running on 11.03.2022 and restarted on 19.03.2022 and further, as per the fourth proviso, if after exclusion of the time period allowed to the Assessee for filing reply to the notice u/s 148A(b), the period of limitation available to the AO for passing order u/s 148A(d) of the Act is less than seven days, the remaining period shall be extended to seven days. In the case in hand, after excluding the time period consumed of eight days from the issue of notice u/s 148A(b) till the filing of the reply by the Assessee to the said notice, the order u/s 148A(d) and the notice u/s 148 of the Act have been issued well within the limitation period. Similarly, in our view, for the purpose of Section 151 of the Income Tax Act, the said limitation period as provided u/s 149 of the Act, including the third and fourth provisos for calculating the time period of three years, would also apply. Therefore, in our view, the three years’ period from the end of the relevant year has to be counted accordingly as per the provision of Section 149 of the Act for obtaining approval of the specified authority. It will be an implausible, far-fetched and unconvincing interpretation of the relevant provisions of Sections 149 read with Section 151 of the Act to interpret that the three years’ limitation period for issuing of notice u/s 148 of the Act as prescribed u/s 149 will be different and for obtaining approval of the specified authority u/s 151 of the Act will be different. Both the provisions of Sections 149 and 151 of the Act, in our view, are required to be read in consonance and in harmony with each other as they operate collectively and not in isolation to each other and hence, the three years’ period of the relevant assessment year for issuing notice u/s 148 of the Act and for obtaining sanction u/s 151 of the Act has to be counted after excluding the period as provided under the third and fourth provisos to Section 149 of the Act.

9. Further, it is noted here that the aforesaid anomaly stood removed by the insertion following provisos to Section 151 of the Act with effect from 01.04.2023:

“… Provided that the period of three years for the purposes of clause (1) shall be computed after taking into account the period of limitation as excluded by the third or fourth or fifth provisos or extended by the sixth proviso to sub-section (1) of section 149.”

10. The said proviso, in our view, is clarificatory in nature and supports the view taken by us as discussed above. Merely because the said proviso has been inserted with effect from 01.04.2023 that, in our view, would not lead to any conclusion that before such insertion, the provisions of Section 151 are to be read on a standalone basis and in isolation from the provisions of Section 149 of the Act. In our view, even before the insertion of the above stated provisos to Section 151 of the Act, the provisions of Sections 149 and 151 had to be read together to arrive at a harmonious view and hence, the period of three years cannot be different for the purpose of computing limitation for the issuance of a notice u/s 148 of the Act and for obtaining approval of the specified authority u/s 151 of the Act. Therefore, this issue is also decided against the Assessee and in favour of the Revenue.

11. Now coming to the merits of the case, the Ld. CIT(A) has also deleted the additions on merits. The relevant part of the order of the Ld. CIT(A) is reproduced as under:

“…6.18 In nutshell, if the facts of the case on hand are tested in the line of the decisions of the Hon’ble Courts (Supra), the same are squarely applicable in the case of the appellant in as much as the appellant has categorically demonstrated with all supporting documentary evidences including bank statements, invoice of brokers, contra accounts and statements of sale proceeds. It is reiterated that the receipt of money being sale proceeds on account of sale of shares are routed through banking channel only and in none of the account, cash was ever deposited to show circulation. It is also the fact that A.O has no evidentiary or corroborative value for the reason that the A.O has merely relied on the report of DI(Inv.), Ahmedabad. The A.O has framed the assessment order without conducting any inquiry from the relevant parties or independent source of evidence. Even the statement recorded by the Investigation Wing has not been got confirmed or corroborated by the person during the assessment proceedings. The A.O has neither conducted any inquiry nor has brought any clinching evidences to disprove the evidences produced by the appellant. On the other hand, the case of the appellant is on much better footing as may be verified from the factual matrix of the case. The appellant has adduced more than adequate quantities of evidences, material which are sufficient to prove identities of the parties through whom the appellant has transacted. Eventually, the appellant has fully discharged the onus casted upon him u/s.68 of the Act. Therefore, there is no reason to disbelieve and/or doubt so far as the share transactions are concerned. The A.O could not have formed an opinion on the basis of report from the internal agency. The A.O cannot treat a genuine transaction of sale of share as accommodation entry, without conducting independent inquiries, especially, the appellant has discharged his primary onus.

6.18.1 It is also noticed that the observation/finding of the A.O. is wholly unsustainable and untenable for the reason that there is total lack of application of mind in such a vital matter of serious and far-reaching consequences for tax payers No attempt is made by the A.O. to cross verify facts in records by making reference to appellant’s explanation, few of them, amongst others, are as follows:

(i) The A.O. has not disputed of purchase of shares during the course of proceedings for the year under consideration. Incidentally, without making any reference in the show-cause notice in respect of shares of other domestic companies such as Asian Granito India Ltd., Chartered Logistic Ltd, Jindal Worldwide etc. etc., he has taxed the long term capital gain of Rs.44,19,060/-as income of the appellant u/s 68 of the Act.

It is seen that while passing the impugned order, the A.O. has disallowed the appellant’s claim of LTCG being exempt u/s.10(38) of the Act and has made an addition of Rs.44,19,060/- of the appellant, which is wholly unjustified.

(ii) The statement of third party is said to have been taken by Investigation Wing, Ahmedabad which is not made part of record, who has said anything having any relation with the appellant. The A.O. in his show-cause notice dated 08.03.2024 has referred to the report of the directorate of intelligence however neither the AO has stated anything about such report in the reasons recorded by him nor the A.O. has provided a copy thereof to the appellant for proper rebuttal, if need be arise. Thus, without causing any independent inquiries, the A.O. has proceeded on the basis of such borrowed satisfaction for making impugned addition u/s.68 of the Act.

(iiii) Even the so-called details/papers stated in the order are self serving and have no evidentiary value in the eyes of law.

(iv) The A.O. has failed to corroborate or prove the contents of papers/statements being relied upon without providing copies thereof and/or affording any opportunity to the appellant to cross-examine them.

(v) The company Kushal Tradelink Ltd. is an existing company incorporated in the Companies Act, 1956 having corporate identity No. INE647N01021.

(vi) No notices u/s. 133(6) of the Act are issued by the A.O. to cross verify the dealing of appellant and obtain details from share brokers through whom the share transaction is undertaken by the appellant, nor such notice issued for obtaining details from company whose shares have been purchased or sold by the appellant.; nor any details gathered under such notice from Stock Exchange.

(vii) It is noted that all the payments in respect of shares sold are through banking channel only and the A.O. has not pin-pointedly detected any entries in cash either prior or subsequent to the dates of sales. In all fairness, the A.O. was duty bound to make some efforts to bring some evidence on record to disbelieve the appellant’s claim.

(viii) The A.O. has not brought any material on record to show that the appellant was carrying on any business which could be sourced to earn any such un-disclosed income.

(ix) There is no cash credit introduced in the books of account, but what the appellant has disclosed in the return of income has been long term capital gain which is exempted by virtue of provision of Section 10(38) of the Act.

(xi) With regard to statement of the third party and other material collected behind the back and used against the appellant without affording cross-examination.

(xii) It is stated that the broking company M/s. ASE Capitai Market Pvt. Ltd. is nowhere appearing in the list of persons involved in the alleged scam in the body of assessment order.

(xiii) The company Kushal Tradelink Ltd. was not black listed by SEBI at the relevant point of time. It is submitted that the A.O. has not relied upon the order dated 22.12.2017 of SEBI, nowhere in the said order, however, there is no mention of, the script of Kushal Tradelink Ltd. was black listed nor the name of the appellant appears in the referred report for alleged rigging of prices by the appellant in any manner.

(xiv) The entire case of the revenue is based on the report of the investigation wing.

(xv) It is stated that all documentary evidences/material have been submitted before the authorities below with fairly detailed written submission dated 19.03.2022, 27.09.2023, 09.03.2024 & 11.03.2024.

6.19 Regarding invoking of provisions of section 68 of the Act:

6.19.1 During the course of the appellate proceedings, the appellant has also placed on record that even the appellant’s case cannot be brought under ambit of provisions of section 68 of the Act, for the reason that as per the settled position in law, the appellant has to prove the identity of the party through whom sale consideration is received, creditworthiness and genuineness of the transaction. In this context, it is seen that the appellant has received the sale consideration through a recognized broker being a member with BSE/NRD/NSE, bearing SEBI Registration No. INB011107431 whose contract notes and contra accounts are produced during the course of assessment proceedings. Thus, the identity undoubtedly proved. Similarly, creditworthiness is also proved by placing contra account of the broker on record. Thirdly, with regard to genuineness of the transaction, it is submitted that the entire sale consideration has been received through proper banking channel, by producing copies of bank statements evidencing transaction of sale of shares including purchases as well. Thus, by adducing more than adequate evidences on record, the appellant has discharged not only primary onus but in entirety, cast upon the appellant within the meaning of provisions of section 68 of the Act. The case of the appellant is covered by the decision of Hon’ble Gujarat High Court in the case of Rohini Builders reported in [2002] 256 ITR 360 (Guj) for the proposition that in view of the provisions of section 68 of the Act, the appellant has to prove identity, genuineness and creditworthiness of the transaction and once the assessee has established such, then the onus stands duly discharged by the assessee. It is to state here that the Hon’ble Supreme Court has dismissed the special leave petition filed by the revenue against this judgment. Furthermore, the decision of Hon’ble Gujarat High Court in the case of Dharmdev Finance P. Ltd. reported in [2014] 43 Taxmann.com 395 (Guj) also supports the contention of the appellant wherein the Hon’ble High Court has held as under:

“Section 68 of the I.T. Act, 1961-cash credit (burden of proof)- various additions were made to the assessee’s income on account of cash credit-it was found that in respect of said credits the assessee had filed PAN of creditors, their confirmation and their bank statement which established their creditworthiness. Moreover, transactions were made through banking channel whether any addition could not be made u/s. 68 of the Act? Held, Yes.”

6.19.2 In the case on hand, I find that the appellant had discharged its onus of proving the identities, creditworthiness and genuineness of the transaction by producing supporting documents (Supra). Therefore, there won’t be any justification even to implicate the appellant under the mischievous provisions of section 68 of the Act. Moreover, the assessing officer cannot be permitted to take different view for the part of consideration when all the consideration on the sale of shares of Kushal Tradelink Ltd. has been received from the said registered share broker. This very fact substantiate genuineness of the transaction carried out by the appellant and the A.O. has accepted short term capital gain on sale of shares of Kushal Tradelink Ltd. on 28.04.2017 through ASE Capital Market Ltd. The appellant has disclosed the same in the original return of income filed as chargeable to tax @15% on it. This very fact is more than sufficient to delete addition as the A.O. has not only accepted the cost of acquisition of such shares but also the sale value of the same sold through the very same broker besides consistency has to be followed and the A.O. has taken two different view on the sale of same scrip. The very fact that appellant has sold the 38000 bonus shares for Rs. 14,63,962/- without claiming any cost of acquisition also proves the bonafide of the appellant that his transaction in the said scrip was genuine which cannot be doubted. Therefore, also the addition so made by A.O. is unsustainable and liable to be deleted.

6.20 In view of the above stated facts and circumstances of the case of the appellant, the premise of the appellant having earned bogus LTCG and consequent addition u/s.68 of the Act so made by the A.O. of Rs.44,19,060/- on account of LTCG in sale of scrip of Kushal Tradelink Ltd. is not sustainable. On the other hand, the appellant has duly discharged the primary onus cast under section 68 of the Act by furnishing more than adequate documentary evidences on record, as mentioned in previous paragraphs. The A.O. did not find any infirmity in those primary documents but relying on information supplied by the DDIT(Inv.), Ahmedabad, he proceeded to make addition without any inquiries thereof, in the hands of the appellant which in my opinion is not sustainable.

6.21 I need not elaborately discuss the other cases cited by the appellant. Considering the facts of the case, the evidences placed on record and in view of above detailed discussions, I am of the considered view that the appellant has discharged the onus cast upon him by provisions of section 68 of the Act. The addition made by the A.O. is guided by surmises, conjectures and presumptions. Accordingly, the A.O. is directed to accept the genuineness of the transactions of sale of shares and the capital gain derived by the appellant. The A.O. is therefore, directed to delete the addition so made of Rs.44,19,060/- and restore back the claim of appellant u/s.10(38) of the Act. Thus, the ground no.2, 3 & the issue at item of Sl. No (F) of grounds of appeal no.1 so raised by the appellant are allowed.

7. Ground No.3 of appeal relate to charging of tax u/s.115BBE of the Act. Since I have deleted the impugned addition of Rs.44,19,060/- in entirety, this ground become infructuous.

8. Ground No.4 of appeal relate of the appeal related to initiation proceedings u/s 271AAC of the Act, being emmature in nature is dismissed

9. Ground No.5 of appeal relates to charging of Interest u/s 234B & 234C of the Act. Since the charge of interest is consequential in nature, this ground of appeal is dismissed.

10. In the result, the appeal is partly allowed.”

12. A perusal of the above reproduced relevant part of the order of the Ld. CIT(A) shows that the Ld. CIT(A) has extensively examined the issue on merits and has given a detailed finding. We find merit in the observation of the Ld. CIT(A) that the present assessment order has been passed by the AO without application of mind. It was clearly explained by the Assessee before the AO that the Assessee had not only earned short term capital gains of Rs. 59,728/- but also long term capital gain of Rs. 43,20,210 /-. The AO, though accepted the short term capital gains shown by the Assessee relating to the same scrip of M/s. Kushal Limited, however, in respect of the long term capital gains shown by the Assessee, the AO has disbelieved the assessee giving no reasons as to why the transaction relating to STCG has been accepted and why LTCG has not been accepted. Further, the Assessee duly explained that the Assessee had earned long-term capital gain of Rs. 43,20,210/-, whereas the Assessing Officer without application of mind has made the addition based on the information received from the Investigation Wing, as per which the transaction amount was Rs. 44,19,060 /-. The Ld. AO did not apply his mind at all to the submissions of the Assessee and various details and evidences furnished by the Assessee to prove the genuineness of the transactions. The Ld. CIT(A), on the other hand, has thoroughly examined the issue and has categorically held that the Assessee has duly proved the genuineness of the transaction. That the Assessee had not only carried out transactions in the case of M/s. Kushal Trading Limited but also in scrips of other companies also; and that data showed that the Assessee was a bona fide investor, there was no allegation of any price rigging or accommodation entry in the case of the broker. Therefore, the Assessee has proved the genuineness of the transactions. We do not find any infirmity in the order of the Ld. CIT(A) and the same is upheld on merits.

13. In the result, though the Revenue succeeds on legal grounds, however, there is no merit in the appeal of the Revenue on factual merits. In view of this, the appeal of the Revenue stands dismissed.

Order pronounced in the Open Court on 24/06/2026.