Case Law Details

Case Name : Shri Kamal Kishore Soni Hyderabad Vs ITO (ITAT Hyderabad)
Appeal Number : ITA No.1680/Hyd/2019
Date of Judgement/Order : 15/04/2021
Related Assessment Year : 2011-12

Shri Kamal Kishore Soni Vs ITO (ITAT Hyderabad)

Assessee has made the investment in the shares of Rockon Fintech in the year 2008-09 whereas the report of the investigation wing is dated 16.3.2018. Therefore, the argument of the assessee’s counsel that the assessee could not have known that Rockon Fintech is a penny stock company in the year of purchase of shares is quite acceptable. It is also seen from the Paper Book filed by the assessee that the assessee has been engaged in the trading of shares of a number of companies and Rockon Fintech is not only one company whose shares  the assessee has traded in. Further, it is also seen that the assessee has sold all of his shares and has incurred loss of Rs.506/- on the sale of shares of M/s. Rockon Fintech while  short  term  capital gain of Rs.20,770/- was admitted in  the  I.T.  return  of  the assessee along with other income. Thus, according to him, even if there has to be any disallowance, it can be of  Rs.506/-  only and not the entire value of purchase of shares of the said company at Rs.2,35,644/-. I am convinced with the argument of the assessee that the shares were purchased as long as back in the year 2008 and sold immediately thereafter and the assessee has incurred a loss and only such amount can be  disallowed. On  going through the assessment order as well as the order of the CIT (A), I find that that the main reason for the disallowance is that the Rockon Fintech is a penny stock company and the assessee has invested in penny stock. None of the authorities below have verified the sources for the investment. From the details filed by the assessee before this Tribunal, it appears, that the assessee  has  used  the sale consideration (after sale of other shares) for purchase of shares of Rockon Fintech and immediately thereafter, on sale  of the said shares, the assessee has utilized the said  sale consideration for purchase of other shares. Further, the assessee has not made any gain from sale of those shares, nor has  he claimed any exemption u/s 10(38) of the Act. Therefore, I am convinced that the intention of the assessee was not to make any gain out of purchase and sale of shares of penny stock company. Thus, no disallowance can be made, leave alone the disallowance of value of shares invested.

FULL TEXT OF THE ITAT JUDGEMENT

This is assessee’s appeal for the A.Y 2011-12 against the order of the CIT (A)-3, Hyderabad, dated 19.09.2019.

2. Brief facts of the case are that the assessee, an individual, deriving income (i) from capital gains from trading in shares; and (ii) income from other sources, filed his return of income for the Y 2011-12 admitting total income of Rs.1,61,414/-. Thereafter, the Assessing Officer received information from the Dy. Director of Income Tax (Inv.) Unit-3(2) Mumbai, vide letter dated 16.03.2018 that the  assessee  had traded in penny scrip M/s. Rockon Fintech (earlier known as Insutech India) with the sale value of  the shares at Rs.2,78,753/-. In view of the above, the Assessing Officer had reason to believe that the income chargeable to tax has escaped assessment within the meaning of section 147(b) of the I.T. Act.  He  therefore, initiated re-assessment proceedings by issuance of a notice u/s 148 and called for certain details. The  Assessing  Officer  observed that the Director (Inv.) Kolkata carried out a country wide investigation to unearth the organized racket of generating bogus entries of Long Term Capital  Gains  (LTCG)  which  is  exempt  from tax and the  modus  operandi  adopted  by  the  operators  was  to make the beneficiary buy some shares of a pre-determined penny stock company controlled by them and that these shares are transferred to the beneficiary at a very nominal price and subsequently sold  for  high  price  whereby  the  beneficiary  claims the LTCG arising therefrom as exempt from  tax.  The  Assessing Officer observed that the share price pattern of Rockon  Fintech started  escalating  during  the  financial  year  2010-11   and  there was a sharp  fall  in  financial  year  2011-12.  Therefore,  he  was  of the  opinion  that  this  a  penny  stock  company  and  the  assessee was asked  to  explain  the  source  of  investment  in  the  shares  of this company. The Assessing Officer observed that the sources of investment for purchasing the shares have  not  been  explained  by the  assessee.  He  therefore,  brought  the  sum  of  Rs.2,35,644/-  to tax as unexplained investment in penny stock.  Aggrieved,  the assessee preferred an  appeal  before  the  CIT  (A),  who  confirmed the order of the Assessing Officer and the assessee  is  in  second appeal before the Tribunal by raising the following  grounds  of appeal:

“1. The Order passed by the Commissioner of 1ncome Tax (Appeals) is erroneous in law and on facts of the case.

2. (a) The learned CIT (Appeals) erred in sustaining the addition of 2,35,644/. without appreciating the fact that no such investment was made in the alleged Penny Stock.

(b) The learned Commissioner of 1ncome Tax (Appeals) erred in Sustaining the said addition of RS.2,35,644/. towards Unexplained 1nvestment in the so called Penny Stock without going through the Written submissions made before him.

(c) The learned Commissioner of income Tax (Appeals) erred in Sustaining the addition of 2,35,644/. without appreciating the fact that the Assessing Officer had show caused the figure  at RS.2,78,753/. as information obtained from Investigation wing.

3. Any Other ground/s that may be Urged at the time of hearing”.

3. The learned Counsel for the assessee submitted that the assessee is a trader in shares and he utilizes the sale consideration of one share for purchase of another He submitted that it is only the shares of Rockon Fintech which has been considered as penny stock and the Assessing Officer has not doubted any other transaction. He submitted  that  the  assessee had duly admitted  other STCG and LTCG from the sale of shares and has never claimed it as exempt from tax. Thus, he submitted that the addition of Rs.2,35,644/- as unexplained investment in penny stock is not warranted.

4. The learned DR, on the other hand, supported the orders of the authorities

5. Having regard to the rival contentions and the material on record, I find that the assessee has made the investment in the shares of Rockon Fintech in the year 2008-09 whereas the report of the investigation wing is dated 16.3.2018. Therefore, the argument of the assessee’s counsel that the assessee could not have known that Rockon Fintech is a penny stock company in the year of purchase of shares is quite acceptable. It is also seen from the Paper Book filed by the assessee that the assessee has been engaged in the trading of shares of a number of companies and Rockon Fintech is not only one company whose shares  the assessee has traded in. Further, it is also seen that the assessee has sold all of his shares and has incurred loss of Rs.506/- on the sale of shares of M/s. Rockon Fintech while  short  term  capital gain of Rs.20,770/- was admitted in  the  I.T.  return  of  the assessee along with other income. Thus, according to him, even if there has to be any disallowance, it can be of  Rs.506/-  only and not the entire value of purchase of shares of the said company at Rs.2,35,644/-. I am convinced with the argument of the assessee that the shares were purchased as long as back in the year 2008 and sold immediately thereafter and the assessee has incurred a loss and only such amount can be  disallowed. On  going through the assessment order as well as the order of the CIT (A), I find that that the main reason for the disallowance is that the Rockon Fintech is a penny stock company and the assessee has invested in penny stock. None of the authorities below have verified the sources for the investment. From the details filed by the assessee before this Tribunal, it appears, that the assessee  has  used  the sale consideration (after sale of other shares) for purchase of shares of Rockon Fintech and immediately thereafter, on sale  of the said shares, the assessee has utilized the said  sale consideration for purchase of other shares. Further, the assessee has not made any gain from sale of those shares, nor has  he claimed any exemption u/s 10(38) of the Act. Therefore, I am convinced that the intention of the assessee was not to make any gain out of purchase and sale of shares of penny stock company. Thus, no disallowance can be made, leave alone the disallowance of value of shares invested.

6. In the result, assessee’s appeal is allowed.

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