ITAT Raipur: Bogus LTCG Addition on Penny Stock Cannot Survive Without Evidence Linking Assessee to Price Manipulation or Entry Operators

Askaran Jain HUF Vs ITO (ITAT Raipur)

ITAT Raipur: Bogus LTCG Addition on Penny Stock Cannot Survive Without Evidence Linking Assessee to Price Manipulation or Entry Operators

The Raipur Bench of the ITAT deleted the addition made under section 68 in respect of the sale proceeds of shares of Global Capital Markets Ltd., holding that the Revenue cannot treat genuine stock exchange transactions as bogus merely because the scrip is alleged to be a penny stock, unless it establishes a direct nexus between the assessee and the alleged price-rigging or entry operators.

The assessee-HUF had claimed exemption under section 10(38) on long-term capital gains arising from sale of shares through the Bombay Stock Exchange. The Assessing Officer treated the entire sale consideration as unexplained cash credit under section 68 on the premise that the scrip was manipulated in a penny stock scheme. The first appellate authority upheld the addition by relying upon the Calcutta High Court’s decision in PCIT v. Swati Bajaj.

The Tribunal observed that the assessee had produced purchase bills, demat statements, contract notes, broker’s ledger and other documentary evidence, all of which remained uncontroverted. More importantly, the Revenue failed to establish that the assessee had any connection with the alleged entry operators or brokers, or that the assessee had consciously participated in any price manipulation to obtain bogus exempt gains. The Tribunal distinguished Swati Bajaj, noting that in that case there was concrete evidence of the assessee’s nexus with the manipulation, whereas no such evidence existed in the present case.

The Tribunal also relied on its earlier decision in ITO v. Rahul Kathuria and the Gujarat High Court’s judgment in PCIT v. Gopalbhai T. Patel (HUF) concerning the very same scrip, where it was held that genuine exchange-traded transactions supported by documentary evidence cannot be disregarded merely on the basis of generalized investigation reports. In the absence of any material proving the assessee’s involvement in the alleged rigging, the assessee could only be regarded as an unsuspecting investor. Accordingly, the ITAT set aside the order of the appellate authority and deleted the addition, allowing the appeal of the assessee.

Cases Discussed:

• Pr. CIT v. Gopalbhai T. Patel (HUF), (2025) 181 taxmann.com 773 (Guj.)
• Pr. CIT v. Swati Bajaj, (2022) 446 ITR 56 (Cal.)

FULL TEXT OF THE ORDER OF ITAT RAIPUR

The present appeal preferred by the assessee emanates from the order of the Ld.ADDL/JCIT(A)-2, Mumbai, dated 19.01.2026 for the assessment year 2013-14 as per the grounds of appeal on record.

2. The relevant facts in this case are that the assessee is HUF and during the year under consideration, the assessee has traded in shares of Global Capital Markets Ltd. amounting to sale consideration of Rs.8,50,687/-. That in the assessment proceedings, the A.0 concluded that share transactions were sham involving manipulated price rigging typical of penny stock schemes to launder unaccounted money in the garb of exempt LTCG u/s. 10(38) of the Act. The entire sale consideration of Rs.8,50,687/- was treated as undisclosed funds routed through banking channels and added as unexplained credits u/s.68 of the Act. The total income assessed at Rs.10,49,970/-.

3. The Ld. ADDL/JCIT(A)-2, Mumbai had upheld the said addition relying on the decision of the Hon’ble High Court of Calcutta in the case of Pr. CIT Vs. Swati Bajaj (2022) 446 ITR 56 (Cal.).

4. At the time of hearing, the Ld. Counsel for the assessee submitted that the assessee had furnished all the purchase notes, D-mat account, sale contracts note and client’s ledger from broker etc. before the Department. That the entire sale transactions had been done through online portal of the Bombay Stock Exchange. The Ld. Counsel further submitted that the Department had made the addition on the ground that scrips of Global Capital Markets Ltd. was rigged by entry operator. However, the Department has failed to bring on record any illegal benefit that could have accrued to the assessee for using colourable device and manipulation through entry operator for illegal gains of bogus LTCG u/ s. 10(38) of the Act. The Ld. Counsel further submitted that in the case of Swati Bajaj (supra), there was direct nexus established between rigged scrips and entry operator, broker and elicit gains obtained by the assessee. In the present scenario, the assessee is purely unsuspecting investor.

5. Per contra, the Ld. Sr. DR relied heavily on the orders of the sub­ordinate authorities.

6. That on careful consideration of all the documents on record and hearing the rival submissions, I find force in the contention raised by the Ld. Counsel for the assessee and the ITAT, “DB”, Raipur in the case of ITO/ITO-3(1), Raipur (C.G.) Vs. Rahul Kathuria, ITA Nos. 151 & 152/RPR/2025, dated 26.11.2025 on the similar issue had held and observed as follows:

“8. At the time of hearing, the Ld. Counsel for the assessee submitted that the assessee had filed all the details and evidences regarding entire transactions pertaining to “Oasis Tradelink Ltd.” with cogent evidence and material explaining the total sale proceeds on the sale of shares of Rs.2,03,94,191.10 and that such sale consideration has been duly reported/disclosed in the assessee’s return of income. These facts have not been disputed by the department. It was submitted by the Ld. Counsel that the only ground for which the A.O made addition is that the scrips of “Oasis Tradelink Ltd.” is rigged by entry provider i.e. Mr. Naresh Jain and his associates and therefore, on suspicion only, it has been held by the A.O that the assessee is a beneficiary. However, nowhere in the assessment order, the A.O had brought out any nexus of the assessee with the said Mr. Naresh Jain nor had brought any evidence of nexus that the assessee knowingly took benefit of such rigged shares of “Oasis Tradelink Ltd.”.

8.1    Further, the Ld. Counsel for the assessee submitted that the entire transaction was carried out through recognized stock exchange i.e. Bombay Stock Exchange (BSE) and the assessee is in regular habit of purchase and sale of shares and this is not a case of isolated transaction and if at all, there is any rigging of shares of “Oasis Tradelink Ltd.”, the assessee is merely an unsuspecting investor. Hence, additions in the hands of the assessee is misplaced, arbitrary, bad in law liable to be quashed.

8.2 It is further contended by the Ld. Counsel for the assessee that the department have received information relating to the assessee under the “Risk Management System” for the relevant A.Y. 2018-19, but what are those information which the department has received from the “Risk Management System” was never shared with the assessee for his response in violation of principles of natural justice. That further, the entire spectrum of investigation and addition in this case emanates from search and survey action conducted on a syndicate of persons led by Shri Naresh Jain on 19.03.2019 by DDIT (Inv.), Mumbai. This action reveals that Mr. Naresh Jain has rigged various shares and provided accommodation entries to various beneficiaries. Such report/information of the DDIT (Inv.), Mumbai was also not shared with the assessee and no opportunity was provided to the assessee to cross examine or furnish reply regarding the same. Again, there is gross violation of the principles of natural justice wherein, certain informations were collected on the back of the assessee and have been used against him without even confronting him with the same.

8.3 It was also contended by the Ld. Counsel for the assessee that search and survey action had taken place in the premises of Mr. Naresh Jain and his associates i.e. third party premises and there is no iota of any evidence which even remotely suggests that any search for the relevant assessment year was conducted in the premises of the assessee. Rather, there had been no search and survey at all in the premises of the assessee. Therefore, whatever incrementing materials as alleged by the revenue were unearthed was from the premises of the third party pertaining to the assessee on which basis the department had proceeded against the assessee and in such scenario, assessment should have been completed u/s.153C of the Act and not u/s. 147 of the Act as in the present case of the assessee. Hence, in this count also, the assessment is void ab initio for wrong application of law. It was submitted by the Ld. Counsel therefore that on merits as well as per the legal contentions raised by the assessee, the additions made by the A.O is arbitrary, bad in law, hence, liable to be deleted.

9. Per contra, the Ld. Sr. DR supported the findings of the sub­ordinate authorities and placed reliance on the decisions of the Hon’ble High Court of Calcutta in the case of Pr. CIT Vs. Swati Bajaj, [2022] 446 ITR 56 (Cal) a/w. other decisions as appearing in her written submission dated 04.11.2025 which is placed on record and duly considered herein.

10. We have carefully considered all the documents/materials on record, heard the parties herein and have analyzed the facts and circumstances in this case. That on perusal of the assessment order, it is crystal clear that the A.O has not established any case of any direct nexus of an illegal benefit that has been derived by the assessee knowingly while trading in the scrips of “Oasis Tradelink Ltd.” through the entry provider viz. Shri Naresh Jain and his associates. The assessee had submitted all the details and evidence regarding the entire transaction pertaining to “Oasis Tradelink Ltd.” explaining total sale proceeds on the sale of shares of Rs.2,03,94,191.10 and that such sale consideration has been duly reported/disclosed in the assessee’s return of income. These facts remains undisputed by the department. That the sole reason, for which, the A.O had made addition in the hands of the assessee is that the scrips of “Oasis Tradelink Ltd.” in which the assessee has transacted had been rigged by entry provider viz. Shri Naresh Jain and his associates. However, the Revenue has not brought on record any material/evidence linking the assessee to any dubious transaction related to such entry price riggers or exit providers. The Revenue has also not pointed out by filing any SEBI report mentioning or referring conscious involvement of the assessee in such price rigging and knowingly getting benefit through the entry providers. In fact, at the time of hearing, the Ld. Sr. DR conceded that as per the assessment order, there is no direct nexus brought on record so to even suggest any illegal benefit that was derived knowingly by the assessee while trading in the scrips of “Oasis Tradelink Ltd.” nor any evidence have been placed on record by the Ld. Sr. DR to demonstrate that the assessee was beneficiary in this price rigging by entry provider viz. Shri Naresh Jain and his associates. There has been no transaction between the assessee and the entry provider, no transaction between assessee and broker suggesting malafide gains by assessee. Nothing has been substantiated by the A.O for making the additions. Therefore, we concur with the arguments put forth on merits by the Ld. Counsel for the assessee and we do not find any factual basis for such additions made by the A.O in the hands of the assessee.

11. The reliance placed by the Ld. Sr. DR in the decision of the Hon’ble High Court of Calcutta in the case of Pr. CIT Vs. Swati Bajaj (supra) and other decisions as appearing in her written submission dated 04.11.2025 are absolutely misplaced so far so forth in the said decision of the Hon’ble High Court of Calcutta in the case of Pr. CIT Vs. Swati Bajaj (supra), wherein the Hon’ble High Court had specifically reversed the findings of the Tribunal on the ground that there was direct nexus between the assessee and the entry provider and that it was malafide and conscious transaction entered into by the assessee in connivance with the entry provider/broker and other intermediaries in order to defraud the revenue. However, in the present case, the Revenue has not brought on record any evidence to even suggest that the assessee had willfully transacted in the said share transactions of “Oasis Tradelink Ltd.” so to derive benefit from Shri Naresh Jain and his associates. There is no evidence against the assessee by the Department to suggest any connivance of the assessee and the entry providers to obtain any illegal gains. The assessee had been trading in sale and purchase of shares frequently. That when the Revenue has failed to bring on record direct nexus of illegal benefit being derived by the assessee, in such circumstances, the assessee can only be termed as unsuspecting investor who had entered into investment by way of regular practice and it is not an isolated transaction. Therefore, case laws relied upon by the Ld. Sr. DR being substantially different on facts will not be able to come to the assistance of the Revenue.”

7. The aforesaid decision has considered the facts and circumstances involved in the decision of Swati Bajaj (supra) and similar to facts as per present case also wherein there is no nexus brought on record by the Revenue regarding any illegal gains obtained by the assessee for deliberately conniving with entry operator for rigging scrips of Global Capital Markets Ltd. Nothing is on record to suggest that the assessee while selling scrips had malafide intention and that the assessee had any connection with broker/entry operator rigging the said scrips. Further, as pointed by the Ld. Counsel for the assessee in the case of Pr. CIT Vs. Gopalbhai T. Patel (HUF), (2025) 181 taxmann.com 773 (Guj.), the Hon’ble High Court had affirmed the decision of the Tribunal and held that the said scrips of Global Capital Markets Ltd. which is the same scrips as in the present case, is being continued trading at Bombay Stock Exchange and had not been black listed by SEBI or barred by Security. That further, when the assessee had provided all the evidences of open market trading through online portal, it was not open to the Revenue to make addition without negating those evidences on record. The relevant paras of the aforesaid decision are extracted as follows:

“3.4 The Assessing Officer issued a show-cause notice dated 14.11.2018 asking the assessee to explain as to why transaction of Rs. 7,15,679/- made in Global Capital Markets Ltd should not be added to income of assessee.

3.5 In response to the show-cause notice issued by the Assessing Officer, the assessee filed reply dated 28.11.2018 along with copy of return of income, computation of total income, Bank Statement showing gain earned on sale of scrip, copy of Demat account, broker note of shares sold and copy of ledger account of broker.

3.6 The Assessing Officer, however, did not accept the reply and held that he was having information that the scrip of Global Capital Markets Ltd is used for generating bogus long term capital gain and long term capital loss by recording modus operendi of penny stock and held that entities involved in the transactions were either bogus or devoid of any fmancial capacity to make investment. The Assessing Officer disallowed the entire credit of Rs. 7,15,679/- as unexplained capital by above passing assessment order dated 06.12.2018.

3.7 Being aggrieved, the assessee preferred appeal before the CIT (A) and further explained that the assessee has earned capital gain of Rs. 3,31,781/- which was shown in the return of income. The assessee also explained that the 4000 shares were purchased on 27.03.2003 in the Demat Account and the scrips were held for more than 07 years and ultimately sold on 23.09.2010 through Bombay Stock Exchange.

3.8 The CIT (A), considering the facts of the case, deleted the addition. Being aggrieved the appellant revenue preferred an appeal before the Tribunal. The Tribunal after considering the facts of the case and the holding of the investments made in shares by the respondent assessee for more than seven years upheld the order of the CIT (A) by observing as under:

“12. I have considered the rival submissions of the parties and have gone through the orders of the lower authorities. I have also deliberated on the various case laws relied by the parties. I find that the assessing officer made addition of Rs. 7,15,679/ solely on the basis of information available with him. Neither the source of such information is recorded in his assessment order nor such information was shared with the assessee. The assessee in his reply, specifically mentioned that Assessing Officer considered the sale entry twice including one which is reversed on the same date. Even such fact was not examined by assessing officer, The assessing officer made addition of credit without application of mind. The assessee explained that he made transaction of sale of shares in the legitimate manner and paid STT. The assessee further explained that the holding period of the shares was more than seven years and all the evidences with regard to purchase and sale of scrips was furnished. No comment on such evidence was made by assessing officer on such evidences. The assessing officer has not discussed the basic fact, whether the name of assessee was mentioned in the alleged information or the broker of the assessee was involved in price manipulation with stock exchange.

13. I fmd that the Id CIT(A) granted relief to the assessee buy taking view that complete details of transaction in the form of contract note from broker’s ledger, D-mat account and bank statement was furnished by the assessee The assessee proved the bona fide of nature and source of sum credit in his books. Such explanation provided by assessee has not been considered by Assessing Officer. Assessing Officer has not confronted with any statement or relevant part of material to the assessee, which was violated the principle of natural justice. It was also held that the Assessing Officer has not brought any material on record regarding turnover or profit or net worth of Global Capital Markets Ltd, which is still continuing be traded on BSE or barred by Security and has not been backlisted Exchange Board of India. The shares were purchased through Calcutta Stock Exchange on 27.03.2003 and at that time STT Regulation has not come in force. I find that the ld. CIT(A) while granting relief to the assessee considered entire facts and the evidence filed before him, which does not require any interference, which is affirmed. “

4. From the facts emerging from the record, it appears that the addition of Rs. 7,15,679/- made by the Assessing Officer is made only on the basis of the information available without recording as to from where such information has been received nor such information was shared with the assessee.

5. The assessee in the reply has specifically submitted that the assessee has purchased the shares in 2003 which were sold in the Year 2010 and therefore there is no element of earning long term capital gain within a period of less than one year so as to disallow the entire sale consideration as unexplained investment by the Assessing Officer. It is also not in dispute that the assessee has sold the shares through stock exchange and has also paid the S’IT.

6. In view of such findings of facts recorded by the CIT(A) and the Tribunal, no question of law much less any substantial question of law arises from the impugned order of the Tribunal. The appeal therefore, being devoid of any merits, is accordingly dismissed.”

8. That upon examination of the facts and circumstances in this case and as per aforesaid judicial pronouncements, and its applicability to the present factual scenario, on the same parity of reasoning, I set-aside the order of the Ld. ADDL/JCIT(A) and allow the appeal of the assessee.

9. In the result, appeal of the assessee is allowed.

Order pronounced in open court on 15th day of July, 2026.