Smt. Rekha Modi Vs ITO (ITAT Mumbai)
Mumbai ITAT Deletes Penny Stock Additions Under Section 69A; Investigation Reports Alone Cannot Implicate Every Investor
The Mumbai ITAT disposed of three connected appeals for Assessment Years (AYs) 2013-14, 2015-16 and 2016-17 by treating AY 2013-14 as the lead case, as the controversy and facts were substantially identical. The assessee had originally filed the return for AY 2013-14 declaring income of ₹3,12,520, which was processed under section 143(1). Reassessment proceedings under section 147 were initiated pursuant to information from the Investigation Wing regarding alleged manipulation in the scrips of M/s ACI Infocom Ltd. and M/s Safal Herbs Ltd. The Assessing Officer relied upon investigation reports, statements, alleged price rigging, synchronized trading, SEBI observations, search findings relating to certain persons, and analysis of the financials and price movements of the companies. The AO treated the sale consideration of ₹19,83,364 from M/s ACI Infocom Ltd. shares and ₹17,61,408 from M/s Safal Herbs Ltd. shares, aggregating to ₹37,44,772, as unexplained money under section 69A, and also added ₹5,240 under the head “Income from Other Sources.” The CIT(A) upheld both the reassessment and the additions, applying the principle laid down in CIT v. Durga Prasad More and the test of human probabilities.
Before the Tribunal, the assessee relied upon contract notes, demat records and other documentary evidence to submit that the purchases and sales of shares were executed through a registered broker on the Bombay Stock Exchange. It was contended that neither the AO nor the CIT(A) had brought any material establishing the assessee’s participation in any accommodation-entry arrangement or any nexus with the alleged operators involved in manipulation of the scrips. The assessee submitted that the additions had been made only on the basis of suspicion arising from unusual price movements.
The Tribunal examined the assessment record and observed that the additions were founded on general findings of the Investigation Wing regarding manipulation in the concerned scrips. While the AO had referred to abnormal price movements, synchronized trading, statements of certain persons and other surrounding circumstances, the Tribunal found that no direct evidence had been brought on record to establish that the assessee herself was a participant in any alleged accommodation-entry mechanism. It held that before an addition could be sustained there must be cogent material demonstrating a live nexus between the assessee and the alleged fraudulent arrangement, and that generalized observations regarding manipulation in a particular scrip could not by themselves justify an adverse inference against every investor trading in that scrip.
The Tribunal further recorded that the assessee had produced contract notes for purchase and sale of shares of both companies issued by a registered broker and that the transactions were supported by contemporaneous documentary records. It noted that the Revenue had not produced evidence showing that the assessee had acquired shares through preferential allotments, off-market transactions, cash dealings, entry operators or any other mechanism suggestive of accommodation entries. It also found no material demonstrating that the assessee had paid cash in lieu of receiving the sale proceeds. Accordingly, the Tribunal held that although the investigation material might justify further enquiry, it could not, in the absence of independent evidence connecting the assessee with the alleged scheme, justify treating the entire sale consideration as unexplained money under section 69A. The Tribunal therefore set aside the orders of the lower authorities on this issue and deleted the addition of ₹37,44,772 made under section 69A.
With respect to the addition of ₹5,240 under the head “Income from Other Sources,” the Tribunal held that the issue required factual verification. It restored the matter to the file of the Assessing Officer for fresh examination, directing that the assessee be given an opportunity to furnish relevant documents and explanations regarding the receipt corresponding to the tax deducted at source and whether the related income had been offered to tax. Ground No. 4 was accordingly allowed for statistical purposes.
As regards the grounds challenging the validity of the reassessment proceedings under sections 147 and 148, the Tribunal observed that since the substantive addition forming the basis of reassessment had already been deleted on merits, adjudication of those grounds had become academic for the present. It therefore refrained from expressing any opinion on the legality of the reassessment proceedings and left those grounds open.
For AYs 2015-16 and 2016-17, the Tribunal found that the issues and facts were materially similar to those in AY 2013-14. Applying its findings mutatis mutandis, it deleted the additions sustained by the lower authorities for those years as well. Consequently, the appeal for AY 2013-14 was partly allowed for statistical purposes, while the appeals for AYs 2015-16 and 2016-17 were allowed. The order was pronounced on 23 June 2026.
