ITAT Deletes Bogus LTCG addition for Lack of Price Rigging Evidence

Tejash Ramesh Shah Vs ITO (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT), Mumbai, ruled in favor of the assessee, Tejash Ramesh Shah, holding that share transactions verified through DEMAT statements and banking channels cannot be deemed bogus without substantial proof. The appeal challenged the assessment orders treating long-term capital gains (LTCG) from the sale of Midland Polymers Ltd (MPL) shares as unexplained income under Section 68 of the Income Tax Act, 1961. The Assessing Officer (AO) based the decision on a generalized investigation report from Kolkata’s Directorate of Income Tax (Investigation), which alleged that certain penny stocks were used for price manipulation and tax evasion. However, the tribunal found that the AO failed to establish a direct link between the assessee’s transactions and such alleged manipulation.

The assessee provided comprehensive documentary evidence, including broker’s notes, bank statements, DEMAT statements, share price movement data, and company annual reports, all of which supported the legitimacy of the transactions. The Securities and Exchange Board of India (SEBI) had not flagged MPL shares for irregularities, and the AO did not produce any concrete evidence contradicting the assessee’s submissions. The ITAT referenced multiple judicial precedents, particularly PCIT vs. Indravadan Jain (HUF) (Bombay High Court, ITA 454/2018) and Shyam R. Pawar (229 Taxman 256, Bombay High Court), which held that if share transactions are conducted through stock exchanges, backed by DEMAT accounts, and settled via banking channels, they cannot be arbitrarily treated as bogus without independent proof.

The ITAT also cited its Delhi and Mumbai bench rulings in Puja Gupta vs. ITO (ITA No. 6890/Del/2018) and Ramesh Rikhavdas Shah, HUF vs. ACIT (ITA No. 3545 & 3546/Mum/2023), where similar share transactions were upheld as genuine. The tribunal found that the AO merely relied on third-party reports without conducting any independent investigation into the assessee’s specific transactions. In the absence of any evidence proving collusion in price rigging or black money circulation, the ITAT concluded that the income tax authorities wrongly denied the exemption under Section 10(38) on LTCG.

Dismissing the addition under Section 68, the ITAT termed the assessment flawed and perverse, allowing the appeal in favor of the assessee. The ruling reinforces the principle that tax authorities cannot arbitrarily disregard documented transactions without solid evidence and that stock market gains, if legally executed and properly accounted for, should not be subjected to undue scrutiny.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Instant appeals of the assessee were filed against the orders of the National Faceless Appeal Centre, Delhi (NFAC) *for brevity, ‘Ld.CIT(A)’+ order passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for Assessment years 2015-16 and 2014-15, date of orders04/10/2024.Impugned orders were emanated from the order of theLd. Income-tax Officer-25(3)(5), order passed under section 143(3) read with section 147 of the Act,1961 for A.Y. 2014-15 and order passed under section 143(3), date of order 30/12/2017 for A.Y. 2015-16.2

2. Both the appeals are having same nature of facts and a common issue. Therefore, both the appeals are taken together, heard together and disposed of by this common order. ITA No.5814/Mum/2024 is taken as the lead case.

3. The brief facts of the case are that the assessee had purchased 10,000 equity shares of Midland Polymers Ltd (MPL) through Bombay Stock Exchange (BSE) on 30/03/2012 @ Rs.30.25 per share. The shares are delivered in the demat account of the assessee and for this impugned assessment year, the purchase cost was Rs.1,51,734/-. The Face Value of the shares had split from Rs. 10/- to Rs. 1/- per share. The split increased the quantity from 10,000 to 100,000 with proportionate reduction in the market price. Subsequently, bonus was issued in the ratio 1:1 which made the quantity of equity shares to 200,000. After one year, the assessee sold the share in staggered manner in two assessment years i.e.A.Y. 2014-15 & 2015-16. The assessee sold the shares for A.Y. 2015-16`amount to Rs.63,31,089/- and after deduction of the proportionate purchase cost, the assessee earned long term capital gain (LTCG) amount to Rs.61,75,355/-. Based on the findings of the Kolkata Investigation Directorate, the Ld.AO found that the assessee dealt with the share of Midland Polymers Ltd and considered the said scrip as penny stock and the exemption U/s 10(38) was rejected on LTCG and treated the amount to Rs.61,75,355/- as a bogus transaction and accordingly, the addition was made under section 68 of the Act. The Ld.AO described the modus operandi of the penny stock in the impugned assessment year but was not able to bring any material fact with his own investigation. The assessment order was assailed before the Ld. CIT(A). The Ld.CIT(A) confirmed the impugned assessment order. Being aggrieved on the appeal order, the assessee filed an appeal before us.

4. The Ld.AR argued and stated that said share was never been rejected by the SEBI and assessee received the excess share by the bonus declaration. The relevant page of the bonus declaration is annexed in APB page 92. The assessee filed all the relevant documents before the revenue which were also submitted before the Bench. The said evidence and documents are as follows:-

5. The Ld.AR further argued that the same scrip was duly considered by the order of the ITAT, Delhi Bench-F in the case of Puja Gupta vs ITO in ITA No.6890/Del/2018, date of pronouncement 02/04/2019 and the order of the coordinate bench of ITAT, Mumbai Bench “D” in the case of Ramesh Rikhavdas Shah, HUF vs ACIT in ITA No.3545 & 3546/Mum/2023, date of pronouncement 25/07/2024. The relevant paragraph 8 is as reproduced below:-

“8. We heard the parties and perused the record. We notice that the assessing officer has primarily placed reliance on the report given by the Investigation wing of the Income tax department, Kolkatta in order to arrive at the conclusion that the long term capital gains reported by the assessee in both the years is bogus in nature. We notice that the investigation report prepared by Investigation wing, Kolkatta is a generalized report with regard to the modus operandi adopted in manipulation of prices of certain shares and generation of bogus capital gains. We notice that the AO has placed reliance on the said report without bringing any material on record to show that the transactions entered by the assessee were found to be a part of manipulated transactions, i.e., it was not proved that the assessee has carried out the transactions of purchase and sale of shares in connivance with the people who were involved in the alleged rigging of prices. The Ld A.R submitted that the transactions carried on by the assessee were not subjected to scrutiny by SEBI at all.

9. We notice that the assessee has purchased the shares from Stock exchange platform and also sold the shares in the stock exchange platform. Both the transactions have been carried out at the prevailing market rates only. The assessee has furnished evidences to prove the factum of purchase and sale of shares. The financial transactions have also been carried out through banking channels. The shares have entered into and exited from Demat account of the assessee. We notice that the AO did not find any fault with the documents so furnished by the assessee. Under these set of facts, we are of the view that the decision rendered by Hon’ble Bombay High Court in the case of Indravadan Jain (HUF) (supra) will squarely apply to the facts of the present case. In the above said case, the Hon’ble Bombay High Court held as under:-

“….The CIT(A) came to the conclusion that respondent bought 3000 shares of RFL, on the floor of Kolkatta Stock Exchange through registered share broker. In pursuance of purchase of shares the said broker had raised invoice and purchase price was paid by cheque and respondent’s bank account has been debited. The shares were also transferred into respondent’s Demat account where it remained for more than one year. After a period of one year the shares were sold by the said broker on various dates in the Kolkatta Stock Exchange. Pursuant to sale of shares the said broker had also issued contract notes cum bill for sale and these contract notes and bills were made available during the course of appellate proceedings. On the sale of shares respondent effected delivery of shares by way of Demat instruction slips and also received payment from Kolkatta Stock Exchange. The cheque received was deposited in respondent’s bank account. In view thereof, the CIT(A) found there was no reason to add the capital gains as unexplained cash credit under section 68 of the Act. The Tribunal while dismissing the appeals filed by the Revenue also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange. The ITAT therefore, in our view, rightly concluded that there was no merit in the appeal.”

Accordingly, we are of the view that there is no reason to suspect the transactions of purchase and sale of shares of above said company declared by the assessee in both the years under consideration. Accordingly, the estimated commission expenses added by the AO to the total income of both the years are also liable to be deleted.”

The co-ordinate bench of ITAT-Mumbai passed the order relying on the order of Hon’ble Bombay High Court in case of PCIT vs. Indravadan Jain (HUF) in ITA 454/2018.

6. The Ld. DR vehemently argued in favor of the orders passed by the revenue authorities and relied upon the same. However, the Ld. DR was unable to cite any contrary judgment that would refute the submissions made by the Ld. AR.

7. After hearing the rival submissions and carefully considering the documents available on record, we note that the assessee earned LTCG related to the scrip MPL through transactions conducted on the BSE. No adverse findings or comments have been issued by SEBI regarding this scrip, and the Ld. DR was unable to submit any such directions or allegations by SEBI related to the scrip in question. The Ld. AO did not reject any of these primary pieces of evidence during assessment proceeding. In this context, the Hon’ble Bombay High Court in Shyam R. Pawar, 229 Taxman 256 (Bom) held that when details of share transactions are substantiated by DEMAT account statements and contract notes, and the Assessing Officer fails to prove such transactions as bogus, the capital gains cannot be treated as unaccounted income under Section 68 of the Act.

The Ld. AR respectfully relied on the order of the coordinate bench of ITAT, Mumbai, D-Bench in the case of Ramesh Rikhavdas Shah, HUF (supra) where the assessee earned LTCG on same scrip MPL after detailed observation the bench allowed the appeal of the assessee and directed the Assessing Officer to allow the exemption on LTCG. The said order was followed by the ruling of the Hon’ble Bombay High Court in case Indravadan Jain (HUF)(supra). The coordinate bench of ITAT Delhi-F in the case Puja Gupta (supra) allowed the appeal of the assessee related to the same scrip & allowed the exemption claimed U/s 10(38) of the Act. We find no evidence of any irregularities or price rigging concerning the scrip MPL. We find no basis to conclude that the assessee was involved in any price rigging or circulation of black money to generate LTCG. The evidence and documents submitted during the assessment proceedings were neither denied nor challenged in terms of their authenticity.

Accordingly, we hold that the appeal order is flawed and perverse. The addition under Section 68 of the Act amounting to Rs. 61,79,355/- is hereby deleted.

ITA No.5813/Mum/2024

8. The facts and circumstances in this appeal are identical to the facts and circumstances in ITA No.5814/Mum/2024, which we have already dealt with above. Therefore, the decision arrived at in the foregoing paragraphs shall apply mutatis mutandis to this appeal also.

9. In the result, the appeals of the assessee bearing ITA Nos.5813 & 5814 /Mum/2024 are allowed.

Order pronounced in the open court on 06^th day of January, 2025.