ITO Vs Kaushal Chand Daga (HUF) (ITAT Jodhpur Bench)
Penny Stock Cannot Be Taxed on Penny-Worth Suspicion—LTCG Exemption u/s 10(38) Allowed & Gross Sale Proceeds Addition u/s 69A Deleted
The Alleged Penny-Stock Gain
The Assessee-HUF filed its return declaring total income of ₹5,34,420. It also disclosed long-term capital gain of ₹13,60,338 arising from the sale of shares of M/s ACI Infocom Ltd. & claimed exemption u/s 10(38).
Based on information received from the Investigation Wing, the AO formed the view that ACI Infocom Ltd. was a penny-stock company whose share prices had been manipulated to provide accommodation entries in the form of exempt LTCG. Notice u/s 148 was accordingly issued on 18.03.2020.
The Assessee had purchased 10,000 shares on 25.08.2011 for ₹2,58,739 & sold them during FY 2012-13 for ₹16,21,960.
Documents Versus Doubts
The Assessee explained that the shares had been purchased & sold through a registered stockbroker on a recognized stock exchange. The purchase consideration was paid through banking channels, the shares were credited to & later debited from the demat account, sale proceeds were received through banking channels & Securities Transaction Tax was paid.
Bank statements, demat statements, contract notes & STT particulars were furnished in support.
The AO remained unconvinced. Referring to the Investigation Wing’s report, unusual price movement & the weak financial fundamentals of ACI Infocom Ltd., he concluded that the transaction was a prearranged device to convert unaccounted money into exempt capital gains.
Curiously, instead of adding only the alleged gain of ₹13.60 lakh, the AO treated the entire gross sale consideration of ₹16,21,960 as unexplained money u/s 69A r.w.s. 115BBE. Total income was assessed at ₹21,56,380.
CIT(A) Follows an Identical Precedent
The CIT(A) found that all transactions were supported by contemporaneous evidence routed through regulated channels. The AO had not disproved the bank entries, demat account, contract notes or payment of STT. Nor was any material produced linking the Assessee with an entry operator or price-rigging activity.
The CIT(A) followed the Jodhpur ITAT’s common order in Abhay Kumar Daga (HUF) v. ITO & Nirmala Devi Daga v. ITO, involving the same AY, same scrip & comparable documentary evidence. The addition was deleted & exemption u/s 10(38) was allowed.
The Revenue carried the matter to the ITAT, alleging that the CIT(A) had ignored direct & circumstantial evidence of price manipulation.
General Modus Operandi May Start an Inquiry, Not Conclude It
The ITAT noted that the purchase & sale were reflected in the demat account, while payments & receipts travelled through banking channels. No defect or falsity was established in any document.
There was no finding that the Assessee paid cash to an entry operator, that the sale consideration originated from the Assessee or that the Assessee participated in manipulating the share price.
A general Investigation Wing report describing how penny-stock accommodation entries are ordinarily structured may constitute relevant material for initiating an inquiry. But an addition in the case of a particular assessee must ultimately rest on evidence connecting that assessee to the alleged arrangement.
An unusual increase in market price may generate suspicion. It cannot displace documentary evidence unless the Revenue establishes that the documents are fabricated or form part of a collusive arrangement. Market improbability is a reason to investigate, not a substitute for proof.
Same Scrip, Same Year, Same Result
The decision in Abhay Kumar Daga concerned ACI Infocom Ltd., AY 2013-14, purchase through the same broker & substantially identical records. There too, the Revenue failed to show the assessee’s involvement in price manipulation.
That decision had followed the Rajasthan High Court ruling in CIT v. Smt. Pooja Agarwal, (2017) 299 CTR 524 (Raj.), which upheld genuine share transactions supported by contract notes, demat statements & account-payee payments where no independent inquiry established that cash had travelled back from the assessee.
The Tribunal also referred to Piyush Kumar Gogad v. Pr. CIT, concerning the same scrip, wherein proceedings u/s 263 were quashed because the transactions were verifiable through bank statements & broker notes while the Revenue possessed only suspicion.
The Revenue identified no factual distinction, contrary jurisdictional precedent, specific statement naming the Assessee or cash trail originating from it. Judicial discipline therefore required the same conclusion.
Section 69A Cannot Swallow the Gross Sale Price
The Assessee claimed exemption only on LTCG of ₹13.60 lakh, whereas the AO added gross sale proceeds of ₹16.21 lakh.
Once purchase cost, holding in demat form, sale through the exchange & receipt through banking channels remained supported & undisproved, the recorded sale proceeds could not be branded unexplained money. The AO also failed to establish the statutory requirement that the Assessee was the owner of unexplained money contemplated u/s 69A.
The ITAT upheld deletion of ₹16,21,960 & allowance of exemption u/s 10(38. The Revenue’s appeal was dismissed on merits, notwithstanding the tax effect being below the CBDT monetary limit.
A share price may rise faster than its fundamentals, but an addition cannot rise faster than the evidence. Without an assessee-specific cash trail, false document or link to manipulation, penny-stock suspicion remains only suspicion—not taxable money u/s 69A.
Cases Discussed
- Abhay Kumar Daga (HUF) v. ITO, ITA No.176/Jodh/2022
- Nirmala Devi Daga v. ITO, ITA No.223/Jodh/2023
- CIT v. Smt. Pooja Agarwal, (2017) 299 CTR 524 (Raj.)
- Piyush Kumar Gogad v. Pr. CIT, ITA No.27/Jodh/2021
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, JODHPUR BENCH
This appeal by the Revenue is directed against the order dated 25.11.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi, [hereinafter referred to as “the CIT(A)”]under section 250 of the Income-tax Act, 1961[hereinafter referred to as “the Act”], for the assessment year 2013-14. By the impugned order, the learned CIT(A) deleted the addition of Rs.16,21,960/- made by the Assessing Officer under section 69A read with section 115BBE of the Act by denying exemption claimed by the assessee under section 10(38) of the Act.
2. The Revenue has raised the following grounds of appeal:
1. The Ld. CIT(A), NFAC erred in ignoring the direct and circumstantial evidence brought on record by the Assessing Officer to establish that the assessee is beneficiary of manipulation of the share prices of ACI Infocom Limited which is a penny stock company with a view to record fictitious Long Term Capital Gains of Rs. 13,60,338/- claiming these as exempt from taxation.
2. The Ld. CIT(A) erred in deleting the disallowance of Long Term Capital Gains of Rs. 16,21,960/-added u/s 69A for obtaining fictitious long term capital gains. the fact that the assessee has used colourable device to hide real nature of transaction of accommodation entry. Further, the assessee has failed to prove genuineness of the transaction and also failed to substantiate the same.
3. The order of the Ld. CIT(A) erred in ignoring the facts brought on record establishing manipulation of share prices as part of colorable device to generate fictitious LTCG with the aim to evade taxes due.
4. The Ld. CIT(A) was not justified in considering the facts unearthed during the Investigation Proceedings by the Department that the assessee was indulged in suspicious transaction of accommodation entry to camouflage unaccounted income in lieu of paying mere commission.
5. That the tax effect involved in this case is below the limit laid down in Circular No. 05/2024 dated 15.03.2024 issued by the CBDT, New Delhi but the case falls under exception mentioned in para 3.1.(h) of the above Circular.”
That the appellant reserves its right to add., amend or alter the grounds of appeal on or before the date the appeal is finally heard for disposal.
Facts of the case
3. The assessee is a Hindu Undivided Family. It filed its return of income for the assessment year 2013-14 declaring a total income of Rs.5,34,420/-. The assessee had also disclosed long-term capital gain of Rs.13,60,338/- arising from the sale of shares of M/s ACI Infocom Ltd. and claimed the same as exempt under section 10(38) of the Act. On the basis of information received from the DDIT (Investigation), Unit-8(2), Mumbai, the Assessing Officer formed a belief that M/s ACI Infocom Ltd. was a penny-stock company and that the assessee had obtained an accommodation entry in the form of exempt long-term capital gain. Notice under section 148 of the Act was issued on 18.03.2020.
4. During the reassessment proceedings, the Assessing Officer noticed that the assessee had purchased 10,000 shares of M/s ACI Infocom Ltd. on 25.08.2011 for a total consideration of Rs.2,58,739/-. The shares were sold during the financial year 2012-13 for an aggregate consideration of Rs.16,21,960/-. The assessee claimed long-term capital gain of Rs.13,60,338/- as exempt under section 10(38) of the Act.
5. The assessee explained before the Assessing Officer that the shares had been purchased and sold through a registered stockbroker and a recognised stock exchange; the purchase consideration had been paid through banking channels; the shares were credited to and subsequently debited from its demat account; the sale proceeds had been received through banking channels; and Securities Transaction Tax had been paid. In support of the transactions, the assessee furnished bank statements, demat statements, contract notes issued by the broker and details of the Securities Transaction Tax paid.
6. The Assessing Officer was not satisfied with the explanation. He referred to the information received from the Investigation Wing, the alleged modus operandi adopted in penny-stock transactions, the movement in the price of the shares and the financial position of M/s ACI Infocom Ltd. According to the Assessing Officer, the price movement was not supported by the financial fundamentals of the company and the transactions constituted a prearranged arrangement for introducing the assessee’s unaccounted money in the guise of exempt long-term capital gain.
7. The Assessing Officer accordingly treated the entire sale consideration of Rs.16,21,960/-, as distinguished from the long-term capital gain of Rs.13,60,338/- claimed by the assessee, as unexplained money under section 69A read with section 115BBE of the Act. The total income was consequently assessed at Rs.21,56,380/- by an order dated 21.09.2021 passed under section 147 read with section 144B of the Act.
8. The assessee carried the matter in appeal before the learned CIT(A). The assessee reiterated that all the transactions were supported by contemporaneous documentary evidence and were routed through recognised and regulated channels. It was contended that neither the documentary evidence nor the transactions appearing in the bank and demat accounts had been disproved by the Assessing Officer. It was further submitted that no statement, cash trail, correspondence or other material specifically connecting the assessee with any alleged entry operator or price-rigging activity had been brought on record.
9. The assessee relied, inter alia, on the common order dated 05.01.2024 passed by the Jodhpur Bench of the Tribunal in Abhay Kumar Daga (HUF) v. ITO, ITA No.176/Jodh/2022, and Nirmala Devi Daga v. ITO, ITA No.223/Jodh/2023. The said decision also pertained to the assessment year 2013-14 and involved transactions in the shares of the very same company, namely, M/s ACI Infocom Ltd.
10. After considering the assessment order, documentary evidence and judicial precedents, the learned CIT(A) found that the assessee had furnished the relevant bank statements, demat statements, contract notes issued by the broker and details of Securities Transaction Tax. The learned CIT(A) further found that no specific adverse material had been brought on record by the Assessing Officer to substantiate the allegation that the assessee was a beneficiary of any accommodation-entry arrangement.
11. The learned CIT(A) followed the decision of the Jodhpur Bench in Abhay Kumar Daga (HUF) v. ITO (supra). The relevant extract reproduced in the impugned order reads as under:
“In the present case, it is seen that all the necessary documents and details were duly submitted before the authorities below, which were neither controverted or disproved. Under the facts and circumstances, we are of the considered view that the assessee has discharged the primary onus casted on him in terms of claim of exemption of long-term capital gains under section 10(38) of the Act by establishing the genuineness of transaction of purchase and sale of shares and satisfying the requisite conditions specified therein and therefore, the gains so arising on sale of shares has been rightly claimed as exempt under s. 10(38) of the Act.”
12. Following the aforesaid decision and recording that the facts were identical, the learned CIT(A) held that the assessee had discharged the primary onus cast upon it. The learned CIT(A) consequently deleted the addition of Rs.16,21,960/- and allowed the exemption claimed under section 10(38) of the Act.
13. Before us the learned Departmental Representative (DR) supported the reassessment order. It was submitted that the Assessing Officer had referred to the Investigation Wing report, the unusual movement in the price of the shares and the absence of financial fundamentals commensurate with such price movement. The learned DR contended that the transactions were part of a colourable device to convert unaccounted income into exempt long-term capital gain and that the learned CIT(A) was not justified in deleting the addition.
14. The learned Authorised Representative (AR), on the other hand, supported the order of the learned CIT(A. He submitted that the decisive facts in the present case were materially identical to the facts considered by the Jodhpur Bench in Abhay Kumar Daga (HUF) v. ITO (supra). It was further submitted that the said decision had considered the same scrip, the same assessment year and substantially similar supporting evidence.
15. We have considered the rival submissions and perused the material available on record. We have also considered the reasons recorded by the Assessing Officer, the findings of the learned CIT(A) and the judicial precedents referred to in the impugned order.
16. The controversy before us is whether the learned CIT(A) was justified in deleting the addition of the gross sale consideration of Rs.16,21,960/- made under section 69A of the Act and in accepting the assessee’s claim of exemption under section 10(38) in respect of the long-term capital gain of Rs.13,60,338/-.
17. It is not in dispute that the assessee had furnished the contract notes, bank statements, demat statements and details of Securities Transaction Tax. The purchase and sale of the shares were reflected in the demat account and the payments and receipts were routed through banking channels. The Assessing Officer did not establish any defect or falsity in these documents. There is also no finding that the assessee had paid cash to any entry operator, that any part of the sale consideration had originated from the assessee, or that the assessee had participated in the alleged manipulation of the price of the shares.
18. The assessment order contains an extensive discussion of the general modus operandi allegedly followed in penny-stock transactions. However, a general report or description of a modus operandi may constitute relevant material for initiating an inquiry, but the addition in the case of a particular assessee must ultimately rest upon evidence connecting that assessee with the alleged arrangement. Suspicion arising from an unusual increase in the market price cannot, by itself, displace documentary evidence unless the Revenue demonstrates that the documents are false, fabricated or form part of a collusive arrangement.
19. The learned CIT(A) followed the common order of the Jodhpur Bench in Abhay Kumar Daga (HUF) v. ITO and Nirmala Devi Daga v. ITO (supra). That decision concerned the same assessment year, the same scrip of M/s ACI Infocom Ltd., purchase of shares through the same broker and comparable documentary evidence consisting of contract notes, bank statements and demat statements. The Tribunal found that the documentary evidence had neither been controverted nor disproved and that no material had been brought on record to establish the involvement of the assessee in price manipulation.
20. The common order in Abhay Kumar Daga (HUF) also followed the decision of the Hon’ble jurisdictional Rajasthan High Court in CIT v. Smt. Pooja Agarwal(2017) 299 CTR (Raj.) 524. The Hon’ble High Court noticed that thee is no evidence that the cash has gone back in assessee’s account.The Hon’ble jurisdictional High Court upheld the finding that where the transactions were supported by contract notes and demat statements, payments and receipts were through account-payee cheques, and the Assessing Officer had failed to establish by independent inquiry that the transactions were non-genuine, the transactions could not be rejected merely on the basis of general investigation material.
21. The Jodhpur Bench had also considered the decision in Piyush Kumar Gogad v. Pr. CIT, ITA No.27/Jodh/2021, concerning the same scrip of M/s ACI Infocom Ltd., wherein it was held:
“In the present case, complete details of purchase of shares and sale of shares is verifiable from the bank statement, and also from the broker’s note. The shares are held for long period of time, and there is no material to suggest that such gain is not genuine. There is only a suspicion, and on the basis of such facts, the revisional proceedings initiated are not justified. Hence, we quash the proceedings initiated u/s 263 of the Act.” (para 3)
22. Thus, the learned CIT(A) did not grant relief merely by accepting the documentary evidence at its face value. The learned CIT(A) compared the facts with a decision of the jurisdictional Bench involving the same scrip and the same assessment year and found the material facts to be identical. The precedent followed by the learned CIT(A), in turn, applied the law laid down by the Hon’ble jurisdictional High Court. Judicial discipline required the learned CIT(A) to follow these authorities in the absence of any material factual distinction, stay, reversal or contrary binding decision.
23. Before us, the Revenue has not identified any material distinction between the facts of the present case and those considered in Abhay Kumar Daga (HUF). The Revenue has also not pointed out any document furnished by the assessee which was found to be false or fabricated. No statement of an entry operator specifically naming the assessee, no identifiable cash trail originating from the assessee and no direct evidence of the assessee’s participation in price manipulation has been placed before us. The grounds of appeal substantially reiterate the general allegations contained in the assessment order without controverting the specific factual findings recorded by the learned CIT(A).
24. The Revenue has also not brought before us any contrary decision of the Hon’ble jurisdictional High Court or any decision of a higher forum reversing or displacing the ratio followed by the learned CIT(A). In these circumstances, there is no justification for departing from the binding principles applied by the learned CIT(A), particularly when the material facts have not been shown to be distinguishable.
25. There is one further aspect. The assessee had claimed exemption in respect of long-term capital gain of Rs.13,60,338/-, whereas the Assessing Officer added the entire gross sale consideration of Rs.16,21,960/- under section 69A of the Act. Once the purchase of the shares, their holding in the demat account, their sale through the recognised stock exchange and the receipt of sale consideration through banking channels remain supported by evidence and are not disproved, the recorded sale proceeds cannot be treated as unexplained money merely on the basis of generalised suspicion. The Assessing Officer has not demonstrated how the statutory ingredients of section 69A stood satisfied in respect of the entire gross sale consideration.
26. In view of the foregoing discussion, we find that the learned CIT(A) correctly appreciated the evidence and followed the applicable binding judicial precedents. We do not find any infirmity in the conclusion of the learned CIT(A) deleting the addition of Rs.16,21,960/- and allowing the assessee’s claim under section 10(38) of the Act. Ground Nos.1 to 4 raised by the Revenue are accordingly dismissed.
27. Ground No.5 states that, notwithstanding the tax effect being below the monetary limit prescribed in CBDT Circular No.05/2024 dated 15.03.2024, the appeal falls within the exception mentioned in paragraph 3.1(h) thereof. Since the appeal has been considered and disposed of on merits, this ground does not call for any separate adjudication.
28. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on 01.09.2026.
