Case Law Details
Kunal Arvindbhai Patel Vs ITO (ITAT Ahmedabad)
Material Facts
The assessee, an individual, filed the return for AY 2018-19 declaring income of ₹64,28,580 and claimed exempt long-term capital gains (LTCG) of ₹1,67,46,187 under Section 10(38) arising from the sale of shares of Kushal Tradelink Ltd. The assessment was reopened under Sections 147 and 148, and the Assessing Officer treated the sale proceeds as undisclosed income by making an addition of ₹1,67,46,187 under Section 69A read with Section 115BBE.
Procedural History
The CIT(A), NFAC dismissed the assessee’s appeal. The assessee challenged the reassessment proceedings and the addition before the ITAT.
Legal Issues
The Tribunal considered the validity of the reassessment proceedings and whether the assessee’s exempt LTCG claim on the sale of Kushal Tradelink Ltd. shares was genuine.
Parties’ Submissions
The assessee contended that the transactions were genuine, supported by bank statements, demat records, broker statements, payment of brokerage to a SEBI-registered broker, payment of Securities Transaction Tax, and disclosure of LTCG in the return. It was also argued that the Assessing Officer relied solely on the SEBI report without independent findings.
The Revenue relied upon the assessment order and the order of the CIT(A).
Tribunal’s Findings
The Tribunal noted that although the assessee had produced demat statements, transaction reports, broker statements and bank statements showing transactions through recognised stock exchanges and banking channels, the addition had been made based on investigation findings relating to the Kushal Group and the abnormal rise in the price of the scrip. Relying on its earlier decision in Rameshkumar Karsanbhai Patel Vs. ITO and several judicial precedents concerning penny stock transactions, the Tribunal held that the Revenue had examined the factual circumstances underlying the capital gains claim.
Final Ruling
The Tribunal held that the alleged LTCG claimed by the assessee was bogus and that the Assessing Officer was justified in treating the amount as undisclosed income under the Income-tax Act. The appeal was dismissed.
Cases Discussed
- Rameshkumar Karsanbhai Patel Vs. ITO (ITAT Surat), ITA No. 669/SRT/2025, order dated 09.04.2026
- Suman Poddar Vs. PCIT (Delhi High Court), 112 taxmann.com 329
- Suman Poddar (Supreme Court of India), 112 taxman.com 330
- NDR Promoters (P) Ltd. (Delhi High Court), 102 taxmann.com 182
- Udit Kalra (Delhi High Court), ITA No. 220/2009
- Sanat Kumar Vs. ACIT Delhi, Circle 36(1) (ITAT Delhi)
- Abhimanyu Soin Vs. Asst. CIT, Circle VII, Ludhiana (ITAT Chandigarh), ITA No. 951/CHD/2016
- Somnath Maini Vs. CIT (Punjab & Haryana High Court), 306 ITR 414
- Assistant Commissioner of Income Tax Vs. Som Nath Maini (ITAT Chandigarh)
- Durga Prasad More (Supreme Court of India), (2002) 3 BOMLR 747, 2003 (1) MhLj 420
- Usha Chandresh Shah (ITAT Mumbai), ITA No. 6858/Mum/2011
- Zakrullah Chaudhary (ITAT Pune), ITA No. 669/PN/2012
- Chandan Gupta (ITAT Mumbai), ITA No. 7024/Mum/2010
- Napar Drugs Ltd. (ITAT Delhi), 98 ITD 265
- Rajnish Agarwal (ITAT Chennai), I.T.A. No. 1419/CHNY/2018
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The appeal filed by the assessee is against the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [in short “Ld. CIT(A)”]dated 17.03.2025 for the Assessment Year (in short “AY”) 2018-19.
2. The assessee has raised the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the validity of the reassessment proceedings initiated by the Learned Assessing Officer (“Ld. AO”) without appreciating that the said proceedings were based solely on information received from the Investigation Wing, without any independent application of mind or formation of belief by the Ld. AO. The Ld. CIT(A) failed to appreciate that the proceedings were based on mere borrowed satisfaction and that no direct nexus or live link was established between the information received and the alleged escapement of income.
2. On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) failed to appreciate that even if any material was allegedly found during the search operations on the premises of Kushal Group, the proper course of action would have been to initiate proceedings under section 153C of the Act, and not under section 147, as section 153C overrides section 147 in such cases.
3. On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) erred in disregarding the fact that the Appellant had undertaken genuine transactions in shares of Kushal Limited, as evidenced by the following:
“i. The transaction of purchase and sale of shares of Kushal Limited was undertaken through banking channels;
ii. Shares were sold through recognized stock exchange and securities transaction tax has been paid thereon
iii. Appellant had paid the brokerage to the SEBI registered broker
iv. Shares have been held in demat account throughout the entire holding period.
v. The resultant long-term capital gains were duly disclosed in the Return of Income filed for the relevant assessment year.
4. On the facts and in the circumstances of the case, and in law, the Ld. AO erred in upholding the addition of INR 1,67,46,187 under section 69A read with section 115BBE of the Act (which the CIT(A) has considered to be made under section 68 of the Act) without there being any cogent, corroborative evidence of the Appellant receiving or paying any cash. The impugned addition is thus untenable and deserves to be deleted.
5. Learned AO / Hon’ble CIT(A) has erred in law and in facts by initiating the penalty proceedings under section 271AAC of the Act.
The Appellant craves leave to add, alter, amend or withdraw any of the above grounds at or before the hearing of the appeal.
All the grounds of appeal stated above are without prejudice to each other.”
3. The assessee is an individual and filed return of income on 11.09.2018 declaring total income of Rs.64,28,580/-. During the year under consideration, the assessee has shown exempt income u/s 10(38) of the Income Tax Act, 1961 (in short “the Act”) under the head “Long Term Capital Gains” (in short “LTCG”) to the tune of Rs.1,67,46,187/-. The assessee’s case was reopened u/s 147 r.w.s. 148 of the Act for the A.Y. 2018-19 and notice u/s 148 of the Act was issued on 31.03.2022. The assessee filed return of income in response to notice u/s 148 of the Act on 13.04.2022. Thereafter, notices u/s 143(2) &142(1) of the Income Tax Act, 1961 were issued. The Ld. Assessing Officer (in short “Ld. AO”)observed that the assessee during the year under consideration sold shares of M/s. Kushal Tradelink Ltd. for a total consideration of Rs.1,67,46,187/- as an exempt income u/s 10(38) of the Act. After going through the assessee’s reply the Ld. AO made addition of Rs.1,67,46,187/- on account of sale of shares of M/s. Kushal Tradelink Ltd. u/s 69A r.w.s. 115BBE of the Act.
4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
5. The Ld. Authorised Representative (in short “Ld. AR”) for the assessee submitted that the assessee had undertaken genuine transactions in shares of M/s. Kushal Tradelink Ltd. and has given the details to the Ld. AO such as the details of bank statement related to transaction of purchase and sale of shares of M/s. Kushal Tradelink Ltd., the brokerage paid to the SEBI registered broker and the D-mat account details along with return of income where the LTCG was reflected. The Ld. AR relied upon various decisions of the Hon’ble High Courts as well as the Tribunal. The Ld. AR further submitted that the Ld. AO solely relied upon the SEBI report and has not given any independent finding.
6. The Ld. Departmental Representative (in short “Ld. DR”) for the Revenue relied upon the assessment order and the order of the Ld. CIT(A).
7. We have heard both the parties and perused the material available on record. We find that the assessee has furnished demat statements, transaction reports, broker statements and bank statements evidencing that transactions were routed through recognized stock exchange mechanism and banking channels. The addition u/s 68 has been made on the basis of investigation findings relating to Kushal Group and abnormal rise in price of the scrip. We find that the issue under appeal has been well examined and adjudicated by the Tribunal in the case of Rameshkumar Karsanbhai Patel Vs. ITO in ITA No. 669/SRT/2025, vide order dated 09.04.2026.
7.1 At this stage, it would also be appropriate to refer to various judicial precedents which have dealt with identical issues relating to penny stock transactions and bogus claims of long-term capital gains.
7.2 Hon’ble Delhi High Court in the case of NDR Promoters (P) Ltd, 102 taxmann.com 182, held that where the assessee created lot of paper work to camouflage the transactions of bogus nature to look like genuine, there is no need of cross examination.
7.3 Reliance is being placed on Hon’ble Delhi High Court’s decision of Suman Poddar Vs. PCIT 112 taxmann.com 329 where it was held that the share transactions were bogus because the company whose shares allegedly purchased were of penny stock and this decision was affirmed by Hon’ble Supreme Court, 112 taxman.com 330. The Hon’ble court has opined that in this type of cases, cross-examination opportunity is not required because statements and other material found in the course of investigation were used as a corroborative material to strengthen the findings of Assessing Officer. The Assessing Officer made the addition based on several factors and analysis to prove that there is no genuineness in the transaction and utilised the statements of operators as corroborative evidence only.
7.4 In the case of Udit Kalra ITA No. 220/2009, Hon’ble Delhi High Court held that the company had meagre resources at disposal, negligible profit, but there was unusual and very high growth in the share price which does not support the same, the transaction was held to be sham.
7.5 In the case of Sanat Kumar Vs. ACIT Delhi, Circle 36(1), Hon’ble ITAT Delhi Bench has held that the so-called sale proceeds of shares received and claimed as exempt u/s. 10(38) was held to be sham transaction because of huge price rise of shares at the time of sale despite the fact that company’s profits are negligible and did not support such price rise.
7.6 In the case of Abhimanyu Soin Vs. Asst, CIT, Circle VII, Ludhiana, ITAT, Chandigarh, Bench A, in ITA No. 951/CHD/2016, the Tribunal held as under:-
“On consideration of the facts of the case as a whole it cannot be accepted that the assessee can have long term capital gains of Rs. 80,25,291/-within 17 months of buying of shares at Rs.2,72,000/- a non- descript company incorporated in 2007 which got merged in 2009. This cannot be a case of intelligent investment or a simple tax planning to gain benefit of long term capital gains”.
7.7 In the case of Somnath Maini Vs. CIT 306 ITR 414, the Hon’ble Punjab &
Haryana High Court, held that claim of genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy. Hon’ble Income Tax Appellate Tribunal – Chandigarh, in the case of Assistant Commissioner of Income Tax Vs. Som Nath Maini by placing reliance on the decision of Hon’ble Supreme Court in the case of Durga Prasad More (2002) 3 BOMLR 747, 2003 (1) MhLj 420 has observed as under :-
“It is true that when transactions are through cheques, it looks like real transaction but authorities are permitted to look behind transactions and find out the motive behind transactions. Generally, it is expected that apparent is real but it is not sacrosanct. If facts and circumstances so warrant that it does not accord with the test of human probabilities, transactions have been held to be non-genuine, it is highly improbable that share price of a worthless company can go from Rs. 3 to Rs. 55 in a short span of time. Mere payment by cheque does not render a transaction genuine. Capital gain tax was created to operate in a real world and not that of make belief.
We accordingly set aside the order of the CIT(A)and restore that of the AO.”
7.8 Further, reliance is being placed on the following orders of the Coordinate benches of the Tribunal:
a. Usha Chandresh Shah ITA No. 6858/Mum/2011, Mumbai
b. Zakrullah Chaudhary ITA No. 669/PN/2012, Pune
c. Chandan Gupta ITA No. 7024/Mum/2010, Mumbai
e) Napar Drugs Ltd. 98 ITD 265, Delhi
7.9 The Co-ordinate Bench of ITAT Chennai in the case of Rajnish Agarwal in I.T.A.No.1419/CHNY/2018 has held that the penny stock not having any financial strength of its own and the sale and purchase of these shares were held to be sham and LTCG u/s. 10(38) was denied to the assessee.
8. We, therefore, hold that the facts and circumstances of the present case are very tightly knit case where the Revenue has gone behind the transaction of capital gains to know the factual operation of sudden volatility in the prices of the scrip. The present case is, therefore, required to be adjudicated on the given set of facts and evidence.
9. In view of the above discussion, we hold that the alleged long-term capital gain claimed by the assessee is bogus and the Assessing Officer was justified in treating the same as undisclosed income under the Income-tax Act, 1961.
In view of the above, the grounds of appeal raised by the assessee are dismissed.
10. In result, appeal of the assessee is dismissed.
Order pronounced in the open court on 30.06.2026
Author Bio
