Suresh Nanji Dabhi Vs ITO (ITAT Mumbai)
Section 68: Penny-Stock Allegations Cannot Replace Evidence Linking the Assessee to Price Rigging—ITAT Mumbai Deletes Addition
The controversy
The Mumbai Tribunal deleted an addition of ₹1,17,80,499 under Section 68, representing sale proceeds of shares in an alleged penny-stock company.
The Assessing Officer relied upon Investigation Wing information concerning price manipulation and accommodation entries. However, he did not establish the assessee’s participation in the alleged arrangement or identify defects in the documents supporting the transactions.
The Tribunal also deleted the consequential addition for alleged commission under Section 69C, holding that its foundation disappeared once the principal addition failed.
Investigation information triggered reassessment
The assessee, an individual engaged in share transactions, had not filed his return for AY 2012-13.
The Department received information that shares of Exelon Infrastructure Ltd. had allegedly been used to provide accommodation entries involving bogus capital gains and losses.
The investigation referred to the company’s weak financial position and abnormal share-price movements unsupported by any substantial improvement in performance.
Since the assessee had traded in that scrip, the Assessing Officer reopened the assessment. Following non-compliance with the assessment notices, an order was passed under Section 144 read with Section 147.
Entire sale proceeds treated as unexplained
The Assessing Officer recorded that the assessee sold 3,22,077 shares for ₹1,17,80,499 and referred to a short-term capital loss of ₹16,92,189.
He treated the transactions as non-genuine, relying upon the alleged modus operandi of purchasing and selling shares to generate artificial capital gains or losses.
Consequently, the entire sale consideration was added under Section 68. A further addition was made under Section 69C towards alleged commission for arranging the transactions.
The Commissioner (Appeals) upheld the additions.
Assessee disputed the alleged tax benefit
Before the Tribunal, the assessee contended that he was a regular investor trading through recognised stock exchanges.
He emphasised that no benefit of the alleged short-term capital loss had been taken. Since the original return had not been filed, the loss had not been carried forward.
The assessee therefore challenged the description of himself as a beneficiary of an accommodation-entry arrangement.
This circumstance did not independently establish genuineness, but it directly challenged the Assessing Officer’s explanation of the supposed tax-avoidance purpose.
Actual transactions differed from the generic modus operandi
The assessee explained that the shares had been purchased and sold through BSE/NSE and a registered broker, rather than acquired through private placement.
The Tribunal recorded an average purchase price of ₹11.18 and average sale price of ₹10.95. It considered this small price difference inconsistent with the broad allegation of an unusual price movement in the assessee’s transactions.
The shares were credited and debited through the demat account, Securities Transaction Tax had been paid, and the consideration passed through normal banking channels.
The assessee relied upon ledgers, demat records and bank statements to substantiate the transaction trail.
Revenue did not controvert the documentary evidence
The Tribunal found that the Assessing Officer had not negated the evidence produced to demonstrate genuineness.
No discrepancies were identified in the documents or transaction particulars. Nor did the Revenue produce material establishing the assessee’s involvement with accommodation-entry operators, price riggers or exit providers.
The Tribunal held that, after the assessee produced evidence establishing the transaction trail, the Revenue had to substantiate its contrary allegation.
A general investigation report concerning the scrip did not, in these circumstances, establish that this assessee’s sale proceeds represented unexplained money.
Suspicion concerning the company did not establish the assessee’s role
The Tribunal acknowledged that the Assessing Officer had analysed the company’s financials and relied upon investigations into the alleged penny-stock mechanism.
However, the conclusion implicating the assessee remained unsupported by cogent material.
The Assessing Officer had not established a connection between the assessee and the alleged manipulation. The addition therefore rested on assumptions, conjectures and surmises rather than a demonstrated sham transaction.
Considering the complete record, the Tribunal directed deletion of ₹1,17,80,499 under Section 68.
Consequential commission addition also failed
The alleged commission expenditure had been estimated as a percentage of the impugned sale proceeds.
The Tribunal held that this addition was consequential to treating the principal share transaction as an accommodation entry. Once that finding failed, the estimated commission addition had no foundation and was also directed to be deleted.
The grounds challenging reopening were left undecided as academic. The assessee’s appeal was allowed on merits.
Author’s comments
The decision highlights the distinction between evidence of manipulation in a scrip and evidence connecting a particular assessee to that manipulation.
Exchange execution, banking channels and demat records are important supporting evidence, though they should not be treated as an automatic answer to contrary material. Here, relief followed because the documents remained uncontroverted and the alleged connection was not established.
The order also contains an apparent numerical inconsistency: it describes commission as 3% of ₹1,17,80,499, but records the addition as ₹35,34,150. Three per cent would be approximately ₹3.53 lakh. The consequential addition was deleted in any event; the stated figure should therefore be used with this qualification.
Cases Discussed
- Shri Ketan G Mehta (ITAT Mumbai, ITA No. 3870/Mum/2023) — exact TaxGuru case page not verified
- Smt. Uma Iyer Vs ITO (ITAT Mumbai, ITA No. 1046/Mum/2024) — exact TaxGuru case page not verified
- PCIT Vs Ziauddin A Siddique (citation/date not specified in order)
- Vijayrattan Mittal Vs DCIT (ITAT Mumbai, ITA No. 3311/Mum/2019, 01.10.2019)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The instant appeal arising from the appellate order dated 15.09.2025 is preferred by the Assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 144 r.w.s. 147 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 04.12.2019 for the Assessment Year [A.Y.] 2012-13.
2. The grounds of appeal are as under:
1) Validity of Assessment u/s 147 (1)
a) The reassessment order dated 04-12-2019 passed by the ITO 25(3)(1), Mumbai; [‘AO”‘ is without jurisdiction, invalid, illegal, void and bad in law inter-alia, as it is passed based on the notice issued u/s 148 solely relying on the information received from DDIT(Inv), Hence the notice do not fulfil the requirements of Section 147 of the Income Tax Act, 1961.
b) The Commissioner of Income Tax (Appeal), NFAC ought to have held that the above reassessment order was without jurisdiction, invalid, illegal, void. and bad in law.
(2) Addition of Rs. 1,17,80,499/- as unexplained cash credit
c) On the facts and circumstances of the case and in law, the Learned NFAC [“CIT(A) erred in Commissioner of Income Tax (Appeal) confirming an addition of Rs. 1,17,80,499/- made by the Income Tax Officer, Ward 25(3)(1), Mumbai (‘AO’) as unexplained cash credit u/s 68 of IncomeTax Act.
d) On the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in confirming the entire sales consideration of Shares of M/s Exelon Infrastructure Ltd. as unexplained cash credit without taking into consideration the cost of acquisition of shares.
e) On the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in confirming the action of AO of ignoring the fact that the appellant has not claimed the short term capital loss as alleged since the appellant has not filed return of Income which has resulted into the loss being lapsed.
(3) Addition of Rs. 35,34,15o/- as unexplained expenditure
(a) On the facts and circumstances of the case and in law, the Lrnd CIT(A) grossly erred in confirming addition of Rs. 35,34,15o/- as unexplained expenditure u/s 69C being alleged commission@3 % of total sale consideration as beneficiary of STCL.
(b) On the facts and circumstances of the case and in law, the Lrdn CIT(A) has grossly erred in confirming making the addition on ad-hoc basis as percentage of entire sale consideration of alleged penny stock.
(4) On the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in passing the Assessment Order u/s 144, not evaluating and ignoring the facts available on record.
3. Facts of the case are that assessee, an Individual derives income from share trading. During the relevant year, he had not filed return of income. He was subjected to re-assessment proceedings under section 147 of the Act based on the information received from the Investigation wing of the Department regarding transactions in shares by the assessee in alleged Penny stock company i.e. M/s. Exelon Infrastructure Ltd. We take up ground nos. 2 and 3 first, which pertain to merits of the additions. It was submitted that the AO has grossly erred in making addition of Rs. 1,17,80,499/- as Unexplained Credit u/s 68 by taking only sales value of the said scrip. Further, the AO without any substantive evidence of alleged payment of commission, made an addition @ 3% of sale value of Rs. 1,17,80,499/- amounting to Rs. 35,34,150/- u/s 69C as unexplained expenditure.
4. According to the assessment order, the assessee had not filed return of income for the year. Considering the failure on the part of the assessee to disclose the full income, after recording the reasons for reopening, notice u/s.148 of the Act was issued. In the reasons recorded, it was mainly alleged that “information has been received from the Deputy Director of Income-Tax (Inv) Unit -6(2), Mumbai, vide letter No. DDIT (Inv.)/Unit-6(2)/Information/2018-19 dated 05.03.2019 that the Investigation Wing of the Department had carried out enquiries into allegation that the shares/scrip of M/s. Exelon Infrastructure Ltd., a penny stock company, had been used to provide accommodation entries of bogus Long-term Capital Gains / Losses to beneficiaries. As part of the enquiries, the DDIT (Inv.), Unit-6(2), Mumbai had obtained the trade data of the scrip and financials of the company for analysis. The analysis revealed that:(a) the networth and financials of the company was negligible. (b) there was no substantial change in the performance of the company that could have led to any sharp movement in the share price of the company despite that there had been abnormal movement in the share price of the company. Consequently, on perusal of the trade data of Ms. Exelon Infrastructure Ltd., obtained from Stock Exchange, the assessee has traded in this scrip of the bogus entity during the F.Y. 2011-12 relevant to A.Y. 2012-13 for value of Rs. 1,17,80,499/–. The information now available was carefully perused. On the basis of the aforesaid information available with the undersigned, I have reason to believe that income chargeable to tax, as indicated above, to the tune of Rs. 1,17,80,499/-, has escaped assessment within the meaning of section 147 of the IT Act 1961 as the assessee has failed to disclose fully and truly all materials facts for the year under consideration.”
4.1 However, the assessee failed to comply with the notice issued u/s. 148 of the Act, as also to the statutory notices and show cause issued as to why this transaction in said shares should not be treated as non-genuine. The conclusion drawn by the AO was based on the observations that the assessee purchased and sold shares of a company which had no financial standing. The assessee sold 322077 shares for a consideration Rs.1,17,80,499/- and in the process claimed Short Term Capital Loss of Rs. 16,92,189/-. Further, the price movements of shares of the company were not in line with any commercial principle and market factors. Facts emerged from investigation revealed that such trading transactions of purchase and sale of shares were not effected for commercial purpose but with the intention to create artificial Long-term Capital Gain / Short-term Capital loss with a view to evade payment of taxes. Considering the findings of the Directorate of Investigation in relation to the inquiries conducted in the case of the shares of company, brokers, operators, entry providers and the nature of transaction entered into by the assessee, the Short term Capital Loss of Rs. 16,92,189/- claimed by him was held as non-genuine. Resultantly, the alleged amount of Rs. 1,17,80,499/- received by assessee as sales proceeds on sale of shares of the alleged penny stock company was treated as unexplained cash credit u/s.68 of the Act and added back to the total income of the assessee. the AO passed an order u/s 144 rws 147 of the Act, making additions as under:
| Add: Addition of Sale Proceeds of Shares of Exelon | 1,17,80,499/- |
| Infrastructure Ltd. as unexplained cash credit u/s 68 | |
| Add: Addition as 3% commission on Rs. 1,17,80,499/- as Unexplained Expenditure u/s 69C | 35,34,150/- |
| Total | 1,53,14,169/- |
4.2 The ld.CIT(A) upheld the additions endorsing the assessment order.
5. Before us, the ld.AR made oral and written submission. It was contended that the assessee is a regular investor carrying out buying and selling of shares on BSE/NSE. Further, he had not taken any benefit of short term capital loss (STCL) from alleged penny stock as he was not eligible to carry carried forward the said STCL in view of non-filing of original return of income. Thus, the contention of the AO that he was a beneficiary was not based on any analysis of facts but purely based on the information from Investigation wing of the Income Tax Department.
5.1 Further, the AO observed that these shares were subscribed only for purpose of claiming LTCG. In this regard, it was stated that the shares were bought and sold through SEBI regulated public platform BSE/NSE and the assessee had not acquired/purchased the said shares via private placement mode as alleged. Furthermore, while explaining modus operandi of obtaining alleged bogus short term capital loss, the AO mentioned in the that the shares were purchased at very high price and sold when share prices drops. In this regard, it was stated that the assessee with a view to make some profit, purchased the shares at an average cost of Rs. 11.18 and has sold the shares at an average price of Rs. 1o.95.Thus, the analysis of the AO is not based on factual data as the facts are nowhere near to modus operandi enumerated by him. Further buy/sell transactions were made through the stock exchanges and there was no scope of manipulation of price. On these shares transactions applicable Securities Transaction Tax (STT) had been paid and the sale proceeds were paid / realized by account payee draft/cheque. The shares were purchased and sold within a week time. The transactions entered were genuine and executed through registered broker on public trading platform of BSE/NSE. These shares were credited and debited to Demat account of the assessee. Further, it bought at Rs.11.18 and sold at Rs. 10.95, shares with a small margin on loss which showed there was no unusual jump in share price. Accordingly, the assessee had acted independently and with commercial motive to gain by trading in the shares.
5.2 It was further contended that the finding of the AO is entirely based on the information received from the Investigation wing of the Department. There was no effort on his part to establish a live link for the allegation of entering into pre-conceived transaction by the him. All the transactions were system driven by way of placing bids and execution of matched bids by automated system. Since there was no scope of identifying the buyer / seller question of having pre-conceived steps or artificially structuring of transaction did not arise. There was no allegation on the assessee of being involved in the alleged transactions and its name was not listed in the investigation report of SEBI order and SEBI Adjudication order.
5.3 On the issue of commission @3% the AO, it was stated above findings of the AO is with an arbitrary frame of mind and is based on his presumptions and surmises without corroborating with the documentary evidences. The AO had not provided any substantive proof of its role in the alleged accommodation transaction and being part of the network of people involved in the racket and had not kept on record proof of payment of commission by the assessee. Hence, the allegation of payment to obtain STCL was baseless and without any substantive evidences.
5.4 Further, the ld. CIT(A) had not given any reason for upholding the assessment order and had only reproduced the findings from the assessment order. His conclusion was with an understanding that the assessee was a beneficiary of Short Term Capital Loss, however no such benefit had been used by him. It is submitted that suspicion, however, strong cannot take the place of proof as held by the Apex Court in plethora of cases. The AO had to bring out credible material /documentary evidence to show that the assessee was involved in price manipulation. No cash trail had been found or established by him to substantiate his point of view. The AO referred to modus operandi in case of penny stock by stating the mode of acquisition that is first route of preferential allotment (Private Placement). However, in the assessee’s case shares were purchased from regulated public trading platform of recognized stock exchange which is available to millions of investors wherein it is next to impossible to manipulate price of a particular scrip / share.
5.5 It was noted further that in view of lack of efforts by the Assessing Officer on finding corroborative evidence like details / documents from third party, cash trail and proving non-genuineness of transactions of purchase and sale of alleged penny shares, it was difficult to hold that the said transactions were non-genuine and the proceeds thereof were liable to be taxed under section 68 of the Act. Thus, primary onus was discharged by the assessee. The Assessing Officer merely proceeded to arrive at his conclusion based on third party information coupled with mere surmise and suspicion that the transactions are bogus. It was submitted that assessee had provided all the documents and details viz ledgers, demat account, bank statements etc. However, the allegation of the department was based on suspicion. The assessee had not utilized short term loss on trading of alleged penny stock for setting off against any Short Term Capital Gain and accordingly, there was clear absence of intent to avoidance tax.
5.6 The ld.AR has placed reliance on various coordinate bench decision i.e. Shri. Ketan G Mehta (ITAT Mumbai – ITA No. 3870/Mum / 2023), Smt. Uma lyer Vs ITO, Ward 30(2)(7), Mumbai (ITAT Mumbai, ITA No. 1046/Mum / 2024),PCIT vs. Ziauddin A Siddique,Vijayrattan Mittal vs DCIT [01.10.2019] 3311/Mum/2019 etc.
6. The ld.DR on the other hand relied on the orders of the authorities below.
7. We have carefully considered all the relevant facts of the case. It is evident that the AO made the addition u/s 68 of the Act without negating any of the evidences adduced by the assessee to demonstrate the genuineness of the impugned transaction. None of them have been controverted. The said transactions having been made on stock exchange platform through recognised broker and banking channels could not be rejected out rightly without bringing any material on record to prove its sham nature. We note that transactions for purchase were undertaken on BSE/NSE platform through the broker and so also the sale of the aforesaid shares were undertaken on the stock exchange platform through the SEBI registered broker on which STT was levied and the consideration was routed through normal banking channel. The entire flow of these transactions is corroborated by relevant documentary evidences placed on record. While making the addition, no discrepancies were pointed out by the Assessing Officer in the documents and the details furnished by the assessee. At any stage of the present case, Revenue had not brought on record any material about participation of the assessee with any such dubious transactions relating to accommodation entry, price rigging or exit providers. Once the assessee had produced documentary evidence to establish the veracity of his claim, the burden would shift on the Revenue to establish its case.
7.1 On the perusal of records, it is discernible that AO had proceeded on the basis of analysis of the financials of the company. According to him, sharp movement in the share prices of the aforesaid scrip was not justified. He relied upon the search and survey operations conducted by the Investigation wing of the Department in respect of alleged penny stock which sets out the modus operandi adopted in the business of providing entries for bogus capital gains. The conclusion drawn by the him of implicating the assessee is un-supported by any cogent material on record.
7.2 The assessee is a regular investor carrying out buying and selling of shares on BSE/NSE. Further, he has not taken any benefit of short term capital loss (STCL) from alleged penny stock as he was not eligible to carry carried forward the said STCL in view of non-filing of original return of income. The assessee had purchased the shares at an average cost of Rs. 11.18 and sold the shares at an average price of Rs. 10.95. Thus, the analysis of the AO is not based on factual data as the facts are nowhere near to modus operandi enumerated by him. The assessee had not acquired/purchased the said shares via private placement mode. Further, buy/sell transactions were made through the stock exchanges and there is no scope of manipulation of price. It is also noted that these shares were credited and debited to Demat account of the assessee and applicable Securities Transaction Tax (STT) had been paid on the said transactions. Further, the sale proceeds were paid /realized by account payee draft/cheque. Further the assessee had bought at Rs. 11.18 and sold at Rs. 10.95 shares with a small margin on loss which shows there was no unusual jump in share price.
7.3 In absence of any such material, enquiry and examination, the addition made pertaining to receipt of sale consideration of the impugned transaction could not be sustained. In our considered view, AO has not established that the assessee was involved in price rigging. The finding arrived at by the AO is thus, purely an assumption based on conjectures and surmises. In our thoughtful consideration to the facts and circumstances of the case, we note that the assessee has discharged the burden on him by submitting the relevant documents.
7.4 Considering the totality of facts and circumstances of the case, factual matrix and submissions of parties narrated as well as discussion and observations made herein above, we set aside the appellate order and direct the AO to delete the addition made u/s 68 of the Act. Accordingly, ground no.2 taken by the assessee in this respect is allowed.
8. Addition made by the AO on estimate basis towards commission for arranging alleged capital gains @ 3% is consequential to the addition made towards receipt of sale proceeds of alleged penny stock. Since we have deleted the said addition towards sale proceeds of alleged penny stock in terms of above stated observations and findings, this consequential addition of commission has no foundation to stand.
Accordingly, the same is also directed to be deleted. Ground no.3 taken by the assessee in this respect is allowed.
9. We do not deem it necessary to adjudicate other grounds relating to proceedings u/s 148 of the Act and the consequent reassessment order as they are rendered academic requiring no adjudication.
10. In the result, Assessee’s appeal is allowed.
Order pronounced in the open court on 13/10/2026.
