Sandhya Rakesh Sharma Vs ITO (ITAT Mumbai)
Contract Notes and Demat Records Do Not Establish Genuine LTCG Where Evidence Shows Penny-Stock Manipulation
Summary: The Mumbai ITAT dismissed the assessee’s appeal against additions of Rs. 92,03,421 under section 68 and Rs. 2,76,103 under section 69C, arising out of the sale of Sunrise Asian Ltd. shares, formerly Santoshimaa Tradelinks Ltd. The assessee purchased 21,000 shares off-market for Rs. 4,41,000 in November 2012, subsequently received Sunrise Asian shares following corporate restructuring, and sold 18,850 shares between November 2013 and March 2014 for Rs. 92,03,421. She claimed exempt long-term capital gains of Rs. 88,07,571 under section 10(38). The assessment was reopened on information concerning allegedly manipulated penny-stock transactions.
The Assessing Officer relied on an extraordinary price increase unsupported by company fundamentals, thin exchange trading, SEBI findings concerning Sunrise Asian and connected parties, identified exit providers, and non-compliance with summons seeking an explanation for the investment. The assessee relied on purchase records, demat statements, contract notes and banking records, challenged the use of third-party statements without cross-examination, and denied paying any accommodation-entry commission. The Commissioner (Appeals) upheld the disputed additions.
The Tribunal examined the surrounding circumstances and the SEBI material and concluded that the documentary transaction trail did not establish genuine capital gains on the cumulative record. Relying on the human-probabilities approach in Sumati Dayal and the principles discussed in PCIT v. Swati Bajaj, it upheld the section 68 and section 69C additions. The Tribunal distinguished contrary decisions on their respective facts. Its conclusion regarding cross-examination depended on its finding that the additions were supported by other corroborative evidence, not by third-party statements alone. The appeal was dismissed; the ground challenging initiation of section 271(1)(c) penalty proceedings was premature.
Facts and Transactions
The assessee filed a return declaring income of Rs. 7,82,460. She acquired 21,000 shares of Santoshimaa Tradelinks Ltd. from Silverice Multi Trading Pvt. Ltd. for Rs. 21 per share, investing Rs. 4,41,000. After conversion into Sunrise Asian Ltd. shares on a 1:1 basis, she sold 18,850 shares for Rs. 92,03,421 and claimed section 10(38) exemption on LTCG of Rs. 88,07,571.
Assessing Officer’s Findings
The Department relied on trading patterns, thin volumes, price movements from around Rs. 50 to more than Rs. 615, financial fundamentals and investigative material, including SEBI action and the alleged role of entry and exit providers. It made additions of Rs. 92,03,421 under section 68, Rs. 2,76,103 under section 69C as estimated commission, and Rs. 56 towards alleged unexplained investment.
Assessee’s Submissions
The assessee asserted the transactions were supported by contractual, demat and banking records, and the amalgamation was approved through judicial proceedings. She disputed any direct connection with manipulation and objected to reliance on third-party statements without access and cross-examination. She also disputed the estimated commission for want of direct evidence of payment.
Tribunal’s Findings
The Tribunal assessed the material as a whole, including SEBI action, unusual appreciation, low trading volumes, chronology of share acquisitions and disposals, counterparty conduct and non-compliance with summons. The Bench upheld the two principal additions and rejected the challenge to procedural fairness on the specific record. It treated the penalty ground as premature and dismissed the appeal. The recorded ground concerning Rs. 56 is retained in the original judgment below.
Author’s Comments
Documentary records are relevant but must be evaluated against the surrounding circumstances. An extraordinary share-price increase does not independently establish a sham transaction; the evidentiary finding rests on the combined transaction-specific facts. The natural-justice ruling likewise should not be read as removing cross-examination rights where an adverse statement forms the sole or principal basis of an addition.
Cases Discussed
- PCIT v. Swati Bajaj, (2022) 446 ITR 56 (Calcutta HC) — cited on penny-stock LTCG, evidentiary burden and surrounding circumstances.
- Sanjay Bimalchand Jain v. PCIT, 89 taxmann.com 196 (Bombay HC) — relied upon regarding astronomical share-price increase.
- Sumati Dayal v. CIT, (1995) 214 ITR 801 (SC) — human probabilities.
- CIT v. Durga Prasad More, (1971) 82 ITR 540 (SC) — reality behind apparent documentation.
- Umesh Krishnani v. ITO, Tax Appeal No.137 of 2020, Gujarat HC — estimated commission in bogus LTCG arrangements.
FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER OF MUMBAI ITAT
