Case Law Details
PCIT Vs Mamta Rajivkumar Agarwal (Gujarat High Court)
Gujarat High Court considered a tax appeal filed by the Revenue challenging the order of the Income Tax Appellate Tribunal dated 11.11.2022 for Assessment Year 2013-14. The Revenue questioned the Tribunal’s decision deleting an addition of ₹39,37,423 representing Long-Term Capital Gains (LTCG) claimed as exempt under Section 10(38) of the Income-tax Act.
During assessment proceedings, the Assessing Officer noticed that the assessee had purchased 40,000 shares of Shree Nath Commercial and Finance Ltd. on 08.03.2011 for ₹8,94,323 and subsequently sold 80,000 shares for ₹48,31,746, resulting in LTCG of ₹39,37,423. A show cause notice was issued alleging that the transaction involved a penny stock scheme intended to claim a bogus exemption under Section 10(38). The Assessing Officer treated the purchase as bogus and added the LTCG amount to the assessee’s income.
The CIT(A), however, found that the assessee had produced documentary evidence including purchase and sale bills, broker accounts, bank statements, demat records, and proof of payment through banking channels. The shares were purchased through a recognized broker, credited to the demat account, held for more than one year, sold through a recognized stock exchange, and securities transaction tax (STT) had been paid. The sale proceeds were received through banking channels. The CIT(A) held that these independent and credible documents established the genuineness of the transactions and directed deletion of the addition.
The Tribunal affirmed the CIT(A)’s findings. It observed that the Assessing Officer had taken contradictory positions by treating the transaction as bogus while simultaneously allowing the cost of acquisition of the shares. The Tribunal noted that sales cannot exist without corresponding purchases and that once purchases were accepted as genuine, the sales could not be doubted without adverse evidence.
The Tribunal further observed that a sharp rise in share prices may justify investigation but cannot, by itself, establish that LTCG was bogus. It noted that there was no finding from SEBI or the stock exchange regarding price rigging in the shares of Shree Nath Commercial & Finance Ltd. The Revenue had also not disputed that the shares were purchased through a recognized broker, paid for through cheques, dematerialized in the assessee’s account, sold through the stock exchange after payment of STT, and that sale proceeds were received through banking channels. There was also no evidence that the assessee had paid cash to any buyer, broker, or entry provider to obtain LTCG benefits.
The High Court agreed with the Tribunal’s reasoning and held that there was no evidence on record suggesting that the assessee or the broker had participated in price manipulation of the shares. The Court observed that the Assessing Officer’s conclusions were based on assumptions rather than evidence. Upholding the concurrent findings of the CIT(A) and the Tribunal, the Court held that no substantial question of law arose for consideration. Accordingly, the Revenue’s appeal was dismissed without costs.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. This Tax Appeal has been filed challenging the order of the Income Tax Appellate Tribunal dated 11.11.2022 passed in ITA No. 1788/Ahd/2019 for the Assessment Year 2013-14.
2. The substantial questions of law raised in the appeal read thus:
“(a) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in deleting the addition of Rs.39,37,423/- on account of LTCG claimed as exempt u/s 10(38) of the Act without appreciating that the transaction was pre- arranged as well as sham and was carried out through penny script company / paper company?”
3. The respondent – assessee filed a return of income on 17.03.2015. During the course of assessment proceedings, it was noticed that the assessee has sold 80,000 shares of Shree Nath Commercial and Finance Ltd., for Rs.48,31,746/- which were purchased on 08.03.2011 for Rs.8,94,323/- and earned long term capital gain of Rs.39,37,423/-.
3.1 A show cause notice was issued on 21.03.2016 stating that the assessee had purchased 40,000 shares of Shreenath Commercial & Finance Ltd through Networth Stock Broking Ltd for Rs.8,94,320/ on 08.03.2011, which were sold for Rs.48,31,746/- after one year of its purchase. It was also stated in the show cause notice that the transaction was a penny stock transaction which aimed at availing bogus benefit of long term capital gain exemption u/s.10(38), thereby requesting the assessee to show-cause as to why an amount of Rs.39,37,426/- be not treated as income from other sources and added to the total income.
3.2 The Assessing Officer observed that the assessee had never done such huge share transactions as done in Financial Year 2012-13 and only then she had purchased 40,000 shares of Shree Nath Commercial & Finance Ltd. Treating the script as penny stock, the purchase was treated as bogus purchase and Rs.39,37,423/- was added to the total income. Relying on several decisions of the Tribunal, the CIT(A) held thus:
“2.2 I have considered the facts of the case assessment order in also the submission made by the appellant. I find that AO has made the addition by considering the script as penny stock. AO has stated the appellant has not given reason for purchase of shares and also the price of share has increased very steeply during a short period and has also fallen down quickly. AO has also stated that this company has no credential and the sale rates are hiked artificially with no real buyers so that the inference of sale being bogus is correct. I find that the appellant has duly submitted all the documents with regards to purchase and sales of shares which includes copy of bills of purchases, copy of broker account copy of bills for sale, copy of bank statement. I find that the appellant has purchased the shares through proper recognized broker and has also paid STT at the time of purchase. The share purchased on 8/03/2011 have entered the demat a/con 11/03/2011. The payment of purchase of Rs.894323/- have been made through cheque, therefore the purchases are genuine and verifiable. I find that the shares kept in demat a/c for more than a year and have being sold on 04/12/2012. The payment has also being received in bank and STT has also been paid on sales. All these evidences are independent, credible therefore, cannot be ignored. When the payment for purchase of shares itself has been done through banking channel, the same cannot be manipulated by anyone subsequently. Similarly, the shares were in demat account since 11/03/2011 and were held for a period of more than 12 months before they are sold on the platform of recognized stock exchange. The appellant is not in anyway directly or indirectly related to management of shreenath Finance & Commercial. The AR pointed out that how department can consider each and every transaction in the shares of so called penny stock, ignoring the evidences which are acceptable as per Indian Evidence Act. As per fact on record, the timeline of transaction is logical and beyond suspicion. In my opinion, the transaction is genuine and rejection of the same by the AO is nothing but executive overreach. Appellant has relied upon various case laws which also supports her contention. I therefore treat the transaction as genuine and direct the AO to delete the addition of Rs.39,37,426/-. The ground no.1 of appeal is allowed.”
3.3 The Tribunal confirmed the findings of the CIT(A) insofar as, it held in favour of the assessee. Findings of the Tribunal indicate that the assumption of the AO that the transaction carried out by the assessee are similar to the modus operandi of penny stock was misplaced. The Tribunal on facts observed thus:
“11.1…On analyzing the facts of the present case, we note that the AO on one hand has alleged that the entire transaction was bogus but on the other hand the AO himself has allowed the cost of acquisition against the sale of shares, meaning thereby, the purchase of the shares has been admitted as genuine. The transactions of purchase and sales go hand in hand. In simple words, sales is not possible without having the purchases. Thus, once purchases has been admitted as genuine, then corresponding sales cannot be doubted until and unless some adverse materials are brought on record. As such, we note that the AO in the present case has taken contradictory stand. On one hand, the AO is treating the entire transaction as sham transaction and on the other hand he’s allowing the benefit of the cost of acquisition for the shares while determining the bogus long term capital gain….
11.2 It was alleged by the AO that the price of the share of M/s Shree Nath Commercial & Finance Ltd., increased in a short period of time which is not in commensurate to the financial performance of the company. The rise in the price of the scripts of a company, having no financial base / business activity / profatibility certainly gives rise to the doubt about such increase in the price. But in our considered view, this cannot be a sole criteria for reaching to the conclusion that the bogus long-term capital gain was generated which is exempted under section 10(38) of the Act. Such observation during the assessment proceedings provides reasons to investigate the matter in detail and the same cannot take the place of the evidence. But in the case on hand, there was no finding that the enquiry conducted either by the SEBI or the stock exchange with respect to rigging up of share price of M/s Shree Nath Commercial & Finance Ltd. Similarly, there was no finding with subsequent market price of the impugned scipt. We also note that there was no dispute raised by the Revenue with respect to the following facts:
i. Shares were purchased through broker on recognized stock exchange.
ii. Purchase consideration of share was made through cheque.
iii. Share was duly dematerialized in D-mat account.
iv. Shares were sold through stock exchange after the payment of STT. The transactions have been confirmed by brokers.
v. The payments were received through ECS in the D-mat account.
vi. Inflow of shares are reflected in D-mat account. Shares are transferred through D-mat account and buyer are not known to the assessee.
vii. There is no evidence that the assessee has paid cash to the buyer or the broker or any other entry provider for booking LTCG and share were purchased by the determined buyer.”
4. Hence, the Tribunal held, and in our opinion rightly so that there was no evidence available on record suggesting that the assessee or his broker was involved in rigging up of the price of the script of M/s Shree Nath Commercial & Finance Ltd. The assessee had acted in good faith. The Tribunal, therefore, correctly held that the Assessing Officer had acted only on assumption which was misconceived. The CIT(A) order dismissing the revenue’s appeal was confirmed.
5. Looking to the concurrent findings, we see no reason to entertain this appeal as no substantial question of law, much less a question of law is involved in the appeal. The appeal accordingly stands dismissed with no orders as to costs.
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