ITAT Surat Upholds Bogus LTCG Addition on Sunrise Asian Penny Stock, Applies ‘Human Probability’ Test

Rameshkumar Karsanbhai Patel Vs ITO (ITAT Surat)

The Income Tax Appellate Tribunal dismissed the assessee’s appeal challenging the order of the Commissioner of Income-tax (Appeals), NFAC, for Assessment Year 2015-16. The dispute related to denial of exemption under Section 10(38) of the Income-tax Act on alleged long-term capital gains (LTCG) earned from sale of shares of Sunrise Asian Ltd. and consequent addition under Section 68 as unexplained cash credit.

The assessee had filed a return declaring income of Rs. 6,78,620 and claimed exempt LTCG of Rs. 70,33,182 arising from sale of 15,000 equity shares of Sunrise Asian Ltd. The assessee explained that shares were originally purchased in Financial Year 2011-12 through banking channels as shares of Conart Traders Ltd. from Santoshima Tradelinks Ltd. Pursuant to a scheme of amalgamation sanctioned by the Bombay High Court, Conart Traders Ltd. merged with Sunrise Asian Ltd., and equivalent shares were allotted and later sold through recognized stock exchanges.

The Assessing Officer relied upon investigation reports relating to penny stock manipulation and observed that Sunrise Asian Ltd. was used for generating bogus LTCG entries. The Assessing Officer noted abnormal increase in share prices despite poor financial performance of the company, off-market purchase transactions, and absence of satisfactory documentary evidence regarding purchase and transfer of shares. Consequently, the entire sale proceeds of Rs. 70,33,182 were treated as unexplained cash credits under Section 68. An additional amount of Rs. 35,166 was also added under Section 69C towards alleged commission expenditure for obtaining accommodation entries.

The Commissioner (Appeals) upheld the addition under Section 68 while deleting the estimated commission addition under Section 69C on the ground that the Assessing Officer had no cogent basis for estimating commission at 0.5%. The appellate authority observed that the assessee failed to justify the extraordinary increase and subsequent fall in the share price of the penny stock company. Relying upon the Calcutta High Court decision in Swati Bajaj, the Commissioner (Appeals) held that mere production of documents such as bank statements, contract notes, and demat records was insufficient to establish genuineness where surrounding circumstances indicated manipulation.

Before the Tribunal, the assessee argued that the addition was based merely on general investigation reports and that no direct evidence linked the assessee to accommodation entry operators. It was also contended that no opportunity of cross-examination was provided. The assessee further relied upon documentary evidence including banking transactions, demat statements, contract notes, and payment of Securities Transaction Tax to support the genuineness of the transactions.

The Tribunal examined the history and trading pattern of Sunrise Asian Ltd. It noted that the company had undergone amalgamation with Conart Traders Ltd. and Santoshima Tradelinks Ltd. pursuant to a Bombay High Court-approved scheme. However, the Tribunal observed that trading in the shares remained suspended for substantial periods and that trading volumes were extremely low. The share price rose sharply from around Rs. 60 to over Rs. 500 despite negligible business activity, weak financials, and lack of correlation with broader market trends represented by the Sensex.

The Tribunal further noted that the assessee was not a regular investor and had no knowledge about the company’s fundamentals. The investment had been made in an unlisted company through an off-market transaction on the advice of a relative. It observed that the assessee could not furnish complete documentary evidence such as share certificates, transfer deeds, or proof of transfer procedures. Statements of brokers and operators recorded during investigation also indicated that the scrip was used for providing accommodation entries of bogus LTCG.

The Tribunal referred extensively to judicial precedents including Sumati Dayal, NDR Promoters, Suman Poddar, Udit Kalra, Somnath Maini, and other decisions dealing with penny stock transactions. It held that in such matters, surrounding circumstances and the test of human probabilities are relevant considerations. The Tribunal observed that mere production of contract notes, demat statements, and bank records cannot conclusively establish genuineness when the overall facts indicate a pre-arranged accommodation entry scheme.

The Tribunal concluded that the transactions were not genuine and formed part of a scheme to convert unaccounted income into exempt capital gains. It held that the assessee failed to discharge the burden under Section 68 to satisfactorily explain the nature and source of the credits. Accordingly, the Tribunal upheld the addition under Section 68 and declined to interfere with the order of the Commissioner (Appeals). The assessee’s appeal was dismissed.

FULL TEXT OF THE ORDER OF ITAT SURAT

This appeal has been filed by the assessee against the order dated 09.06.2025 passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as the “Ld. CIT(A)” for short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as the “Act” for short) for Assessment Year 2015-16.

2. The assessee has raised following grounds of appeal :-

“1. Ld. CIT(A), NFAC. Delhi has erred in law and on fact to upheld AO’s disallowance u/s 10(38) of the Act for Rs. 70,33,182/- w.r.t. LTCG on EQUITY shares of listed company namely Sunrise Asian LTD (SUNASIAN), only on the basis of presumptions and surmises. He further erred in ignoring the fact that AO has failed to prove the transactions as non-genuine as well as any evidence as bogus or fabricated.

2. Ld. CIT(A), NFAC, Delhi has erred in law and on fact to upheld AO’s addition u/s 68 of the act for Rs. 70,33,182/- on factually incorrect assumption that the appellant has credited her capital account by share sale receipts in F.Y. 2014-15.

3. Ld. CIT(A), NFAC, Delhi has erred in and on fact to upheld AO’s action of levy of Income-Tax@ 30% u/s 115BBE of the Act.”

2. The assessee has also raised following additional grounds of appeal:-

“Ld. CIT(A), NFAC, Delhi has erred in law and on fact to upheld AO’s action of levy of income-Tax @ 30% u/s 115 BBE of the Act.”

4. The brief facts of the case are that the assessee is an individual, filed return of income for AY 2015-16 declaring total income of Rs.6,78,620/-. The case was selected for scrutiny under CASS on the issue of ‘suspicious sale transaction in shares and exempt Long Term Capital Gains (penny stock) shown in return. During the year under consideration, the assessee earned Long Term Capital Gain of Rs.70,33,182/- on sale of 15,000 equity shares of Sunrise Asian Ltd. (SUNASIAN), which was claimed exempt under section 10(38) of the Act. Before the Assessing Officer, the assessee explained that the shares were originally acquired in FY 2011-12 for Rs.3,00,000/- by purchasing shares of Conart Traders Ltd. from Santoshima Tradelinks Ltd. through banking channels. Subsequently, pursuant to a scheme of amalgamation approved by the Hon’ble Bombay High Court, Conart Traders Ltd. merged with Sunrise Asian Ltd., and the assessee received equivalent shares of Sunrise Asian Ltd., which were later credited in the assessee’s demat account. The Assessing Officer, relying upon information received from the Investigation Wing regarding penny stock manipulation, held that the scrip of Sunrise Asian Ltd. was used for generating bogus LTCG entries. The Assessing Officer observed that the price of the scrip had increased abnormally without any commensurate financial performance of the company and that the purchase transaction was an off-market transaction. According to the Assessing Officer, the assessee had failed to substantiate the genuineness of the transaction with complete documentary evidence; therefore, the Assessing Officer treated the entire sale proceeds of Rs.70,33,182/- as unexplained cash credit u/s 68 of the Act. Further, an amount of Rs.35,166/- was added u/s 69C towards the commission paid for obtaining accommodation entries.

5. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A) who confirmed the addition u/s 68 of the Act but deleted the addition made u/s 69C of Rs. 35,166/- of the Act by observing as under:-

“I have considered the submission of the appellant and gone through the AD’s observation & decision in assessment order and find that the appellant have claimed to have established the genuineness of transaction [purchase and Sales of shares of M/s Sunrise Asian Limited undoubtedly But I find from the assessment order that the AO has doubted genuineness of said transactions not only in assessment order but also he has established how the price of shares of the penny stock companies are rigged and are raised through circular trading.

It is observed that the appellant is unable to file any satisfactory reply to justify the logic behind genuine purchase & sale of the above shares vis-a-vis failed to justify the genuineness of sudden increase and decrease of the prices of the shares.

The appellant cannot escape from the burden cast upon him and unfortunately in this case the burden is heavy as the facts establish that the shares which were traded by the appellant had phenomenal and fanciful time in price in a short span of time. Despite availing adequate opportunity the appellant is unable to establish and prove that there was no manipulation in the other end and whatever gains the appellant has reaped was not tainted I find during the course of assessment the Assessing Officer (AO) has culled out proximate facts in each of the case took into consideration the surrounding circumstances which came to light after the investigation assessed the conduct of the appellant by recording statement issuing summon took note of the proximity of the time between the buy and sale operations and also the sudden and steep rise of the price of the shares of the companies when the general market trend was admittedly recessive and thereafter arrived at a conclusion.

On this issue Hon’ble High Court of Calcutta has held:

[2022] 139 taxmann.com 352 (Calcutta)
HIGH COURT OF CALCUTTA
Principal Commissioner of Income-tax
INCOME TAX DEPARTMENT
Swati Bajaj
T.S. SIVAGNANAM AND
HIRANMAY BHATTACHARYYA, JJ.
IA NO. GA/2/2022 AND OTHERST
ITAT/6/2022 & OTHRS
JUNE 14 2022

Section 68, read with section 10(38), of the Income-tax Act, 1961-Cash credit (Share dealings) Assessment year 2014-15

Whether if there is information and data available of unreasonable rise in price of shares of penny stock companies over a short period of time of little more than one year, genuinity of such steep rise in prices of shares needs to be established and onus is on assessee to do so as mandated in section 68 Held, yes Assessee made investments in shares of company, ‘S’ During relevant assessment year, assessee sold said shares and claimed exemption on long term capital gains Assessing Officer received information from Investigation Wing that prices of some shares of penny stock companies which included company, ‘S’ were artificially rigged to benefit shareholders through bogus claim of LTCG Consequently, notices were issued by Assessing Officer for scrutiny and on analyzing documents submitted by assessee it was observed that assessee purchased shares of ‘S’ for Rs. 1 lakh and when investments in shares became eligible for LTCG it was sold for Rs. 29 lakhs during period when general market trend was recessive -He thus, opined that shares of ‘S’ matched all features of companies which were providing bogus LTCG and made additions under section 68 by treating LTCG as unaccounted income- Whether since assessee failed to establish credit worthiness of companies and that rise of price of shares within a short period of time that too when market trend was recessive was genuine, genuineness could not be established merely on basis of documents like bank details, purchase/sell documents and detail of d-mat account Held, yes Whether thus, in absence of satisfactory explanation by assessee, Assessing Officer was bound to make additions under section 68 Held, yes.

For all the above reasons, I hold that the alleged transaction is obviously made for tax evasion, therefore, such transactions are not genuine but pre-conceived resulting in creation of bogus claim and, therefore, are sham transactions. Accordingly I find no infirmity in the order of the AO and I am of opinion that AO’s decision of invoking provision of section 68 of the I.T. Act is justified in absence of satisfactory explanation on the part of the appellant Accordingly I hold alleged LTCG for sale of share of M/s Sunrise Asian Limited as bogus and not eligible to exemption u/s 10(38) of the IT Act and the addition of Rs.70,33,182/-by invoking provision of section 68 of the I.T Act stand confirmed. This ground of the appellant is dismissed.

I have considered the submission of the appellant in respect of ground relating to commission paid and gone through the AO’s observation & decision in assessment order. I find merit in the contention of the appellant on this ground in as much as the AO is unable either to establish any basis of estimation how he estimated the said 0.5% commission and not 5% or 6 оr 10% commission of unexplained expenditure for the said transaction or the AO is unable to bring any cogent materials of 0.5% expenditure incurred by the appellant before invoking provision of section 69C of the I.T. Act. Accordingly the estimated addition made of Rs.35,166/-[0.5% of 70,33,182/-] by the AC invoking provision of section 69C of the I.T Act stand deleted. Thus this ground is allowed.”

6. Aggrieved by the order of the Ld. CIT(A) confirming the addition u/s 68 of the Act, the assessee is now in appeal before the Tribunal.

7. Before us, the Ld. AR submitted that the Assessing Officer relied only on general investigation reports without bringing any direct evidence linking the assessee with the alleged accommodation entry operators. The Ld. AR also contended that no opportunity of cross-examination was provided in this case. The Ld. AR further contended that :-

i. The shares were duly purchased through banking channel.

ii. Shares were reflected in the demat account.

iii. Sale transactions were carried out through recognized stock exchange with Security Transaction Tax payment.

iv. All documentary evidences such as contract notes, demat statements, an bank statements were furnished before the Revenue Authorities.

8. The Ld. DR, on the other hand, supported the orders of the lower authorities and submitted that the scrip involved was penny stock used for providing bogus LTCG entries and the price movement of the scrip was abnormal. He also argued that the assessee has failed to produce complete evidence of purchase and transfer of shares and, therefore, the addition u/s 68 was rightly made in this case.

9. We have heard the rival contentions and perused the material available on record.

The genesis of the case is as under:-

9.1 The shares of the company “SUNRISE ASIAN LIMITED” were listed 06.08.2001. Sunrise Asian Limited was registered at Registrar of Companies Mumbai on 30 November, 1981 and is categorized as Company limited by Shares and an Indian Non-Government Company. Sunrise Asian Limited’s Corporate Identification Number (CIN) is L51900MH1981PLC025740 and Registration Number is 025740. On 05.05.2010, the Company has changed its name from Akai Asian Ltd. to Sunrise Asian Ltd. Further, in the year 2012-13, the Hon’ble High Court of Bombay has sanctioned the Scheme of Amalgamation of Santoshima Tradelinks Limited, the First Transferor Company and Conart Traders Limited, the Second Transferor Company with ‘the Company’. Sunrise Asian has received the Certified Copy of the Order dated March 22, 2013 passed by the Hon’ble High Court of judicature at Bombay sanctioning the Scheme of Amalgamation of Santoshima Tradelinks and Conart Traders Limited with Sunrise Asian under section 391 to 394 of the Companies Act 1956. Sunrise Asian Ltd has informed BSE that the Company has received the Certified Copy of the Order dated March 22, 2013 passed by the Hon’ble High Court of judicature at Bombay sanctioning the Scheme of Amalgamation of Santoshima Tradelinks Limited (the First Transferor Company) and Conart Trader’s Limited (the Second Transferor Company) with Sunrise Asian Limited, (Transferee Company) “Scheme” under section 391 to 394 of the Companies Act, 1956. The appointed date under the Scheme was April 01, 2012. With respect to the amalgamation of the transferor companies, Santoshima Tradelinks Limited and Conart Traders Limited, the Company shall issue and allot 2,55,57,730 shares of Rs. 10/-each to computed in the ratio of 1 equity shares of Rs.10/- each of the Company for every 1 equity Shares of Rs.10/- each in the transferor company Santoshima Tradelinks Limited held by each shareholder of the transferor Company on the record date and 1,58,23,770 shares of Rs. 10/- each to computed in the ratio of 1 equity share of Rs. 10/- each of the Company for every 1 equity share of Rs. 10/-each in the transferor company Conart Traders Limited held by each shareholder of the transferor Company on the record date, aggregating to 4,14,01,140 shares of Rs. 10/- each.

9.2 It is a fact on record that at the time when shares of Cornart Traders Limited were purchased on 21.08.2011 the shares of Cornart Traders Limited were not trading on any of stock exchange. It is further to note in respect of the company SAL that on 17.09.2011 the market price of the share was around Rs.50 per share on BSE and only one trade took place and the trade volume of shares was only 5 shares with traded value being Rs. 250/-. Before this date since 01.07.2003 there was no trading of share on the BSE. On 9.9.2011 only one trade took place in which 300 shares were traded and thereafter on 16.10.2012 again one trade of 5 shares took place. The suspension in trading of equity shares of the company was revoked with effect from 16.08.2011 and trading in the securities of the company resumed in “T” group with the Scrip Code 506615. Further, the shares of the company again remained suspended between 12.09.2011 to 15.10.2012 when the suspension in trading of equity shares of the company was revoked with effect from 16.10.2012. During most of the period between 09.09.2011 till 30.01.2013, the trade volume remained very thin, in fact, it was only 5 shares to 20 shares except 250 and 300 shares on two days that too in one trade per instance. Due to only deliverable orders, during this period the scrip kept closing at upper circuit limit or very near to the upper circuit limits of 5% on daily basis. From 09.09.2011 (only one trade was made on 17/08/2011 during this period hence this date is being ignored) to 30.01.2013 the share price of the scrip increased from Rs.60 to Rs.329.05 i.e. 448 percent increase in 17 months (total 36 trade days).

9.3 The highest and lowest price of shares of SUNRISE ASIAN LIMITED in the following years were as under :-

9.4 On going through the Annual Report of SAL, it is noticed that

As per the Annual Report of the Company for 2012-13:

Stock Market Data:

The suspension on trading of equity shares of the company was revoked on 16th August, 2012. However, the first trading in the company’s equity shares took place in the month of October, 2012. Therefore, the stock market data are provided from the month of October, 2012.

9.5 The above data further show that the share price of SAL during the FY 2012-13 raised from Rs.53 to 456 within 6 months. Further, the following facts have also been duly considered:-

• • During the period between 09.09.2011 till the end of January 2013 the trade volume remained very thin. In fact, on most of the days the trade volume was only 5 to 50 shares except 250 and 300 shares on two trading days.
  • From 09.09.2011 to 30.01.2013 the share price of the scrip increased from Rs.50 to Rs.329.05 i.e. a 559 percent increase in 17 months (total 36 trade days).
  • During this period of 17 months the shares of the company remained suspended for more than 12 months. (Sept., 2011 to Oct., 2012). During this period of 4 months of trading the trading volume was noticed for 36 days and it was ZERO for the rest of days. From 30.01.2013 to 31.03.2014 the price of the share increased to Rs.564.9 in 292 trade days.
  • A close view of all such data suggests that there is a common pattern in the trading of the script and the pattern is that they represent a bell shape in their trading. It means, first their prices start from a low range, then it raises rapidly stays there for a while and then it decreases more rapidly. The schematic representation as found out by the Revenue is as follows:-

• • From November, 2001 to August, 2011 price of share of M/s Sunrise Asian Limited remained constant at Rs.57/-. Upto 9 September, 2012 it remained around Rs.60/-. For the last 11 years before September, 2012 there was almost no growth in the company. The company running since 1981 but has not earned any substantial income from operations ever and still commanded such premium valuations. Further, there is nothing worthwhile to mention on the front of assets and net worth of the company as well, to conclude that it could command such high premiums.
  • From 16 October, 2012, the price of the stock started to rise. Mostly single trade of 10-20 shares happened in gap of 2-3 days and every time price of stock raised around 5% through circuit for every trade. This trend continued up to January, 2013. Thereafter, upto 8th February, 2013 the prices of stock raised around 4% and number of trades has increased and also the number of shares traded increased. Thereafter the stock rate raised slowly till April, 2015. Peak price of stock was on 13 April, 2015 at Rs.603.25.
  • After 13 April, 2015 price of share decreased till 24 August, 2015 slowly and after this date steep decline can be seen in prices. Rate of decrease in stock on 25 and 27 August, 2015 is 20% every day which is very unrealistic. On 25, 28 August and 1^stSept 2015 rate of decrease in stock was 10% each time. Thereafter, the prices decreased by 5% on 14 occasions consecutively from 2 September, 15 to 24 September, 15. Thereafter, the prices declined by 2% at several occasions. The decrease in price after August 2015 in terms of percentage was noticed at the circuit rate fixed by market regulators. Now as on 19 December, 2016 the price of stock is Rs.2.78/-.
  • This abnormal price rise is also highlighted by the overall percentage increase in the SENSEX during the period when the shares saw phenomenal price rise. Normally, the SENSEX is a benchmark of the average price movement in any share. Most of the stocks which have good market capitalization and are majorly held by public tend to follow the price movement of the SENSEX. The deviation in price movement vis-à-vis SENSEX is usually guided by the fundamentals of the company and the behavior of individual investors. When the price increase in the shares of the scrip was compared with the movement in the SENSEX it was seen that there was no correlation. While SENSEX had shown almost no progress, the price of the scrip moved phenomenally. The following chart shows increase in the price of Sunrise Asian and Sensex from 3. 10.2012 to 31.03.2015.

• • The assessee has no knowledge about share trading or investments in company. The assessee has no idea of any fundamentals of the company. The assessee has just invested Rs.3,00,000/- on advice of his brother namely Mahendra Karsanbhai Patel and earned long term capital gain. The assessee is not a regular investor in shares. Hence, it is quite surprising as to how she earned a phenomenal return of more than 16 times within a short span of period which is extremely unusual. The past records of the assessee for the preceding years show that the assessee has not been active in the stock market. This being the case, the assessee has entered into a sham transaction with the full knowledge of it, so as to convert unaccounted money into accounted money in the guise of capital gains. The assessee purchased shares on 24.08.2011. In spite of novice in share market & no substantial share transactions in the earlier years & subsequent years & when M/s Conart Traders Ltd is not a listed company at any exchange and as on the date of purchase there was no announcement from the company of any amalgamation in a listed company. Further the shares were purchased off line from a Mumbai based company. It is beyond imagination that the assessee being a Surat based individual how came in contact with M/s Samtoshima Tradelinks Ltd of Mumbai for purchase of shares.

9.6 In view of the above discussion as also considering the facts and circumstances of the case, the following facts become very clear:-

(i) That some unscrupulous operators in the capital market were running a scheme of providing entries of LTCG for a commission.

(ii) The financial result of the Penny Stocks used for the purpose clearly indicate that its quoted price at the peak was the result of rigging.

(iii) The above-mentioned facts have independently also been confirmed by SEBI.

(iv) That such schemes are prevalent for converting black money into white is common knowledge, independently confirmed by SEBI.

(v) That a large number of individuals availed of the benefits of the scheme and took entries of LTCG amounting to several crores.

(vi) Many such individuals have voluntarily, without any enquiry by any authority, withdrawn their claim and filed revised return.

(vii) statements of brokers, operators, director of paper companies that has bought these shares, directors of Penny stock companies al confess to such a scheme with detailed modus operandi which allies with actual transactions.

(viii) The assessee is one such beneficiary who has taken entry of LTCG

(ix) Exactly similar entries have been taken by other family members of the assessee, the total amounting to Rs. 1.94 crores.

(x) Neither the assessee nor his family members have either before or after this year have dealt in shares.

(xi) As the trading in these shares are at a pre-determined time between pre-determined brokers at a pre-determined price, there is virtually no scope of any genuine trader in share to buy or sell these shares.

(xii) Thus whoever has benefitted from transaction in these shares have transacted in accordance with the scheme and has admittedly converted his unaccounted cash equal to the sale proceeds of share in to white in the guise of exemption under section 10(38) of the Income Tax Act, 1961.

(xiii) With so much of evidence against the assessee, the onus was on assessee to prove that his transactions were genuine and that he had not availed benefit of the aforementioned scheme to convert black money into white.

9.7 The impugned transaction is also found to be not genuine in view of the following observations and facts:-

(i) The financials of the penny stock Sunrise Asian limited and movement of the price is abrupt, unrealistic and not based upon any realistic parameters. The history of investment in shares made by the also generally reveals that he has not been dealing in shares on a regular basis. It has also been found that entries of LTCG have also been taken by other members of the assessee family.

(ii) The purchase of the shares of Conart Traders Ltd were claimed to be through off market deals.

(iii) The apparent is true until and unless it is disproved. Here it is important to note that the Director Shri Anuj Agarwal of Korp Securities Limited on 31.03.2015 had categorically stated that they have involved in providing accommodation entries regarding sale and purchase of shares through his companies. The relevant extract of statement of Shri Anuj Agarwal recorded on 31.03.2015 have already been reproduced hereinabove.

(iv) Further from the relevant extract of statement of other persons (entry provider / broker) as reproduced above in which they have stated that they were indulged in providing accommodation entry of LTCG which are bogus and they have also used the scrip SUNRISE ASIAN LIMITED for this purpose.

(v) Therefore, human probabilities have also to be applied to comprehend the transactions and to see the real intention behind entering into these transactions. In the similar circumstances, the honorable Gauhati High Court of CIT Vs Sanghamitra Bharali (361 ITR 481) had held that the capital gains are sham transactions entered only to give colour of genuineness and therefore, held that the capital gain arising out of these transactions cannot be believed as genuine and upheld taxing the said amount as unaccounted income brought into books in the guise of exempted capital gains.

(vi) The assessee is unable to furnish any other proof for purchase of shares except the copy of bank statement and a debit note issued by Santoshima Tradelinks Limited. which does not bear the mode of receipt and no mention of receipt of sale consideration and the assessee has not made available the details subsequent to the purchase of share such as copy of share certificates of Conart Traders Ltd or SAL, transfer deed, application form for getting shares of SAL in lieu of Conart Traders Ltd.

(vii) That even assuming the purchase as genuine, the sales, given the high rates for such penny stocks, with no real buyers, are bogus. The evidentiary value of payment of STT and receiving the sale consideration through a share broker through banking channel after selling the share on screen cannot make a non-genuine transaction, a genuine one.

(viii) The scrip is a penny stock, purchased at a low price, which is over a period of time ramped up by operators acting in benami names or name lenders. The purchases are off market purchases, and not reported on the exchange.

(ix) The purchases are in the physical form, and dematerialized only subsequently; generally long after the purchase date and close to the date of sale.

(x) The SEBI clearly held that the company Sunrise Asian Pvt Ltd and its Directors, had devised an arrangement whereby 83 connected entities had manipulated the price of the scrip in four patches of trading, thereby violating Regulations 3(a)–(d) read with Regulation 4(1) of the PFUTP Regulations, 2003. Further, it held that 77 out of the 83 connected entities were counterparties to the sale of shares by 1059 entities/allottees at the artificially inflated/manipulated price thereby violating Regulations 3(a)(d) read with Regulation 4(1), Regulations 4(2)(a) and (e) of the PFUTP Regulations, 2003.

The order of the SEBI reads as under:-

“ It is also noted that during the Financial Years 2013, 2014 and 2015, Sunrise Asian had registered a profit of only ₹0.27 Crore, ₹0.70 Crore and ₹0.95 Crore, respectively. The aforementioned actions of the aforementioned Notices as detailed in the preceding paragraphs clearly resulted in ‘fraud’ under the PFUTP Regulations, 2003, being committed, which in turn affected the interests of investors in the securities market.”

Based on the investigations conducted, the SEBI by its order has barred the trading of the shares of Sunrise Asian Pvt Ltd and also its directors and brokers from operating in the stock market.

9.8 In view of the above, we find that the conduct of the assessee, when examined in light of these facts, does not inspire confidence. The assessee is not shown to be a regular participant in the stock market and has not demonstrated expertise or prior experience in dealing with shares. The investment in question was made in an unlisted company through an off-market transaction without any credible evidence of due diligence or verification of the financial credentials of the company. The assessee has also admitted to having no knowledge about the business or fundamentals of the company and having acted merely on advice. It is highly improbable that such an investor would, in the normal course of conduct, identify and invest in an obscure company and earn extraordinary returns of such magnitude without any underlying economic rationale.

9.9 The findings of the Investigation Wing, as relied upon by the Assessing Officer, further reveal that the scrip in question was used by certain operators and intermediaries for providing accommodation entries in the guise of long-term capital gains. Statements of brokers and other persons involved in such activities indicate the existence of a systematic arrangement for artificially inflating share prices and facilitating exit to beneficiaries. Though the assessee has raised an objection regarding lack of cross-examination, it is noted that the addition in the present case is not based solely on such statements but is supported by independent analysis of trading patterns, financial data and surrounding circumstances which collectively establish the non-genuineness of the transaction.

9.10 It is a settled legal position that in matters of this nature, the apparent must be considered in the light of surrounding circumstances and the test of human probabilities must be applied, as laid down by the Hon’ble Supreme Court in Sumati Dayal v. CIT. Further, under Section 68 of Income-tax Act, the burden is on the assessee to satisfactorily explain the nature and source of the credit. Mere production of documentary evidence such as contract notes, demat statements and bank entries cannot be regarded as conclusive proof of genuineness when the surrounding circumstances clearly indicate that the transaction is a sham. In the present case, the cumulative effect of the facts on record leads to a clear inference that the transaction entered into by the assessee is not genuine and is involved with broker regarding the purchase and sale of shares. The conduct of the company whose shares were traded is wholly inconsistent with its financial position and business activities. The conduct of the assessee is equally inconsistent with that of a prudent and genuine investor. The assessee cannot consider as passive innocent beneficiary. His involvement is overt and conspicuous as prevail from the facts on record. The findings of the Investigation Wing establish that the scrip was part of a larger scheme of providing accommodation entries. The entire chain of events, when viewed in totality, leaves no room for doubt that the transaction was pre-arranged and designed to introduce unaccounted income in the guise of exempt capital gains.

9.11 At this stage, it would also be appropriate to refer to various judicial precedents which have dealt with identical issues relating to penny stock transactions and bogus claims of long-term capital gains.

9.12 Hon’ble Delhi High Court in the case of NDR Promoters (P) Ltd, 102 taxmann.com 182, held that where the assessee created lot of paper work to camouflage the transactions of bogus nature to look like genuine, there is no need of cross examination.

9.13 Reliance is being placed on Hon’ble Delhi High Court’s decision of Suman Poddar Vs. PCIT 112 taxmann.com 329 where it was held that the share transactions were bogus because the company whose shares allegedly purchased were of penny stock and this decision was affirmed by Hon’ble Supreme Court, 112 taxman.com 330. The Hon’ble court has opined that in this type of cases, cross-examination opportunity is not required because statements and other material found in the course of investigation were used as a corroborative material to strengthen the findings of Assessing Officer. The Assessing Officer made the addition based on several factors and analysis to prove that there is no genuineness in the transaction and utilised the statements of operators as corroborative evidence only.

9.14 In the case of Udit Kalra ITA No. 220/2009, Hon’ble Delhi High Court held that the company had meagre resources at disposal, negligible profit, but there was unusual and very high growth in the share price which does not support the same, the transaction was held to be sham.

9.15 In the case of Sanat Kumar Vs. ACIT Delhi, Circle 36(1), Hon’ble ITAT Delhi Bench has held that the so-called sale proceeds of shares received and claimed as exempt u/s. 10(38) was held to be sham transaction because of huge price rise of shares at the time of sale despite the fact that company’s profits are negligible and did not support such price rise.

9.16 In the case of Abhimanyu Soin Vs. Asst, CIT, Circle VII, Ludhiana, ITAT, Chandigarh, Bench A, in ITA No. 951/CHD/2016, the Tribunal held as under:-

“On consideration of the facts of the case as a whole it cannot be accepted that the assessee can have long term capital gains of Rs. 80,25,291/- within 17 months of buying of shares at Rs.2,72,000/- a non- descript company incorporated in 2007 which got merged in 2009. This cannot be a case of intelligent investment or a simple tax planning to gain benefit of long term capital gains”.

9.17 In the case of Somnath Maini Vs. CIT 306 ITR 414, the Hon’ble Punjab & Haryana High Court, held that claim of genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy. Hon’ble Income Tax Appellate Tribunal – Chandigarh, in the case of Assistant Commissioner of Income Tax Vs. Som Nath Maini by placing reliance on the decision of Hon’ble Supreme Court in the case of Durga Prasad More (2002) 3 BOMLR 747, 2003 (1) MhLj 420 has observed as under :-

“It is true that when transactions are through cheques, it looks like real transaction but authorities are permitted to look behind transactions and find out the motive behind transactions. Generally, it is expected that apparent is real but it is not sacrosanct. If facts and circumstances so warrant that it does not accord with the test of human probabilities, transactions have been held to be non-genuine, it is highly improbable that share price of a worthless company can go from Rs. 3 to Rs. 55 in a short span of time. Mere payment by cheque does not render a transaction genuine. Capital gain tax was created to operate in a real world and not that of make belief.

…..

We accordingly set aside the order of the CIT(A)and restore that of the AO.”

9.18 Further reliance is being placed on the orders of the Co-ordinate benches of the ITAT. To mention a few :-

a) Usha Chandresh Shah ITA No. 6858/Mum/2011, Mumbai

b) Zakrullah Chaudhary ITA No. 669/PN/2012, Pune

c) Chandan Gupta ITA No. 7024/Mum/2010, Mumbai

e) Napar Drugs Ltd. 98 ITD 265, Delhi

9.19 The Co-ordinate Bench of ITAT Chennai in the case of Rajnish Agarwal in I.T.A.No.1419/CHNY/2018 has held that the penny stock not having any financial strength of its own and the sale and purchase of these shares were held to be sham and LTCG u/s. 10(38) was denied to the assessee.

10. We, therefore, hold that the facts and circumstances of the present case are very tightly knit case where the Revenue has gone behind the transaction of capital gains to know the factual operation of sudden volatility in the prices of the scrip. The present case is therefore required to be adjudicated on the given set of facts and evidence.

11. In view of the above discussion, we hold that the alleged long-term capital gain claimed by the assessee is bogus and the Assessing Officer was justified in treating the same as undisclosed income under the income tax Act 1961.

Ergo, we decline to interfere with the well reasoned order of the Ld. CIT(A).

10. In the result, the appeal of the assessee is dismissed.

Order pronounced in the open Court on 09.04.2026