Case Law Details
Sacchanand Hiralal Lalwani Vs ACIT (ITAT Nagpur)
Section 68 Addition Deleted Because AO Failed to Disprove Documented Share Transactions; LTCG Exemption Allowed Because Investigation Report Alone Could Not Prove Bogus Transactions; No Section 68 Addition Because Assessee Produced Complete Documentary Evidence; Capital Gains Exemption Restored Because No Evidence Linked Assessee to Price Manipulation; Section 10(38) Relief Granted Because Natural Justice Was Not Followed; Section 68 Addition Set Aside Because Sale Through Recognised Broker Was Properly Documented; LTCG Claim Upheld Because AO Failed to Rebut Demat, Bank and Contract Note Evidence.
The appeal concerned the validity of an addition of ₹3,27,70,750 under Section 68 and the denial of exemption under Section 10(38) in respect of long-term capital gains arising from the sale of shares of Greencrest Financial Services Limited. The assessee also challenged the findings that the share transactions were bogus and alleged violation of the principles of natural justice.
Background of the Case
The assessee filed the return of income for Assessment Year 2015–16 declaring income of approximately ₹1.24 crore and claimed exempt long-term capital gains of about ₹3.57 crore under Section 10(38). The gains arose from the sale of shares of Greencrest Financial Services Limited. The assessee explained that he had acquired 2,00,000 shares of Marigold Glass Industries Ltd. through preferential allotment for ₹24,00,000. Following a share split from a face value of ₹10 to ₹1, the holding increased to 20,00,000 shares, and the company was subsequently renamed Greencrest Financial Services Limited. During the relevant year, the assessee sold 5,87,000 shares through Edelweiss Securities Ltd. on the Bombay Stock Exchange, paid Securities Transaction Tax (STT), and claimed exemption under Section 10(38). Supporting documents, including share application forms, allotment details, bank statements, contract notes, and Demat statements, were furnished.
Assessment Proceedings
The Assessing Officer relied on information from the Investigation Wing, Kolkata, which identified Greencrest Financial Services Limited as a penny stock company. Based on this report and judicial precedents, the Assessing Officer treated the long-term capital gain as artificial and added the amount under Section 68.
Proceedings Before the Commissioner (Appeals)
Before the Commissioner (Appeals), the assessee reiterated that the transactions were genuine and supported them with detailed documentary evidence, including broker details, client ID, contract notes, trade particulars, STT payment details, bank statements, and Demat records. The assessee also contended that the Investigation Wing report had not been supplied and that no opportunity was given to cross-examine any person whose statement was relied upon.
The Commissioner (Appeals) observed that the shares had been acquired through preferential allotment rather than through a recognised broker or stock exchange and referred to the Investigation Wing’s findings regarding alleged price manipulation by Greencrest Financial Services Limited. Applying the test of human probabilities, the Commissioner (Appeals) upheld the Assessing Officer’s action.
Submissions Before the Tribunal
The assessee argued that the investment was genuine, the shares were sold through a recognised stock broker on the Bombay Stock Exchange, STT had been paid, and sale proceeds were received through banking channels. It was also submitted that neither the assessee nor the broker was named in any SEBI proceedings and that a substantial portion of the shares continued to remain with the assessee because their value had subsequently declined. The assessee relied on various Tribunal decisions involving similar facts and the same scrip.
The Revenue argued that the company was merely a penny stock entity with artificially inflated prices and that the transactions were pre-arranged to obtain tax exemption. It maintained that documentary evidence alone did not establish the genuineness of the transactions and that the principles of preponderance of probabilities should apply.
Tribunal’s Findings
The Tribunal observed that the assessee had produced comprehensive documentary evidence, including broker details, contract notes, Demat statements, bank statements, and proof of payment of STT. It noted that the Assessing Officer had not recorded any findings on these documents and had relied on the Investigation Wing report without furnishing a copy to the assessee or providing an opportunity for cross-examination.
The Tribunal held that the assessee had discharged the primary burden of proving the genuineness of the transactions. Once this burden was discharged, the onus shifted to the Assessing Officer to produce adverse material disproving the evidence submitted by the assessee. The Tribunal referred to several judicial precedents holding that where transactions are supported by documentary evidence such as contract notes, Demat records, and bank statements, additions under Section 68 are not justified merely because the scrip is alleged to be a penny stock. It also relied on decisions holding that, in the absence of any allegation against the assessee or the broker regarding price manipulation, exemption cannot be denied solely on the basis of investigation reports.
The Tribunal further noted that the shares had been sold through Edelweiss Securities Ltd. on the Bombay Stock Exchange, STT had been paid, and there was no allegation that either the assessee or the broker was involved in manipulating the share price. It also referred to earlier Tribunal decisions granting relief in cases involving the same scrip.
Decision
The Tribunal held that there was no justification for treating the long-term capital gains as unexplained cash credit under Section 68 in the absence of cogent evidence against the assessee. It deleted the addition of ₹3.27 crore, allowed the exemption claimed under Section 10(38), and allowed the assessee’s appeal. The order was pronounced on 15 April 2026.
FULL TEXT OF THE ORDER OF ITAT NAGPUR
1. This appeal by assessee is directed against the order of ld. CIT(A)/NFAC dated 11.10.2023 for Assessment Year (A.Y.) 2015–16. The assessee has raised following grounds of appeal:
“1. The learned Commissioner (Appeals) erred in sustaining the addition made by the Assessing Officer of Rs. 3,27,70,750/- u/s 68 in relation to sale of equity shares of Greencrest Financial Services Limited.
2. The learned Commissioner (Appeals) erred in denying the exemption claimed by the appellant u/s 10(38) in relation to long term capital gain earned on sale o f equity shares of Greencrest Financial Services Limited.
3. The learned Commissioner (Appeals) erred in sustaining the addition without having any documentary evidence which shows that the share transaction of the appellant was bogus / sham / illegal.
4. The learned Commissioner (Appeals) failed to consider the documentary evidences submitted by the appellant which clearly proved the identity, genuineness and creditworthiness of the sale transaction.
5. The learned Commissioner (Appeals) failed to follow the principles of natural justice by not granting an opportunity to cross-examine / confront the person on whose confession / statement or possession of material / evidence the AO presumed that the share transaction is a bogus / sham / illegal transaction. ”
2. Brief facts of the case are that assessee is individual filed his return of income for A.Y. 2015-16 on 31.10.2015 declaring income of Rs. 1.24 crore. The case was selected for scrutiny. During assessment, the assessing officer (AO) noted that assessee has shown exempt capital gain under section 10(38) of Rs. 3.57 crore. On seeking details, the assessee furnished the working of long-term capital gain, which is recorded in para 3 of assessment order. The assessee explained that he earned long term capital gain on sale of shares of Greencrest Financial Services Limited. The assessing officer recorded that he was having information in his ITD system that Greencrest Financial Services Limited is a penny stock company as per report of Investigation Wing, Kolkata. The AO issued show cause notice as to why claim under section 10(38) should not be disallowed. The assessee filed his reply, contents of which is recorded in para 5 at page 3 of assessment order. The assessee in its reply submitted that he was allotted 2,00,000 equity shares of Marigold Glass Industries Ltd. for Rs. 24,00,000/- on 25.03.2013. The assessee received preferential allotment share. The assessee was allotted 2,00,000 shares on face value of Rs. 10/- each at a premium Rs. 2.00/- per share. Copy of share application, allotment of share certificate, bank statement was furnished. The shares were allotted as per the guidelines of SEBI with the condition of lock in period of one year from the date of allotment. In the month of March, 2014 shares were split from this face value of Rs. 10.00/- to Rs. 1.00/-, owing to this split, the assessee held share of 20,00,000. The share was transferred to Demat account reflecting the splitting of share.The name of Marigold Glass Industries Ltd was changed toGreencrest Financial Services Limited. During relevant financial year, the assessee sold only 5,87,000 shares of Greencrest Financial Services Limited through registered share broker of Bombay Stock Exchange. The shares were sold through well-known share broker namely Edelweiss Securities Ltd. Copy of contract note and statement issued by Edelweiss Securities Ltd. was also furnished. The period of holding of shares were more than one year, therefore, capital gain earned was subject to Securities Transaction Tax (STT), hence the assessee claimed exemption. The AO by referring the investigation report and history of penny stock company and by referring certain case law treated the gain of assessee on transaction of sale of share as artificial long term capital gain and added the same under section 68 in the assessment dated 29.12.2017.
3. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee filed similar submissions as made before AO. In addition to, the assessee submitted that Greencrest Financial Services Limited was a listed company in Bombay Stock Exchange. The assessee entered into genuine transaction. The assessee furnished details of broker, DPID, client ID, contract number with trade date, order number, trade number, scrip name, quantity of shares sold, rate at which sold, brokerage, STT paid, service tax levied, bank statement, Demat statement was also furnished. The assessee also relied on various case laws to substantiate his submission. The assessee objected that AO relied upon information of Investigation Wing, Kolkata without providing copy of such report, no opportunity to cross-examination of the person, on whose confession / statement the AO relied. The assessee also relied on certain case law.
4. The ld. CIT(A) on considering the submission of assessee in para 5 at page 38 of his order noted that allotment was not through broker any recognised broker or by Stock Exchange rather the preferential shares were allotted on direct application for allotment of shares. The Investigation Wing, Kolkata carried out investigation in a number of companies who are involved in giving entries of long-term capital gain, short term capital gain or losses. Greencrest Financial Services Limited is one of such company. Greencrest Financial Services Limited is one of the companies, who are found in manipulation of price. The assessee is not a frequent investor in shares. The ld. CIT(A) by referring the decision ofSumatiDayal vs CIT 80 Taxman 89 and in CIT vs Durga Prasad More 82 ITR 540 held that matter has to be considered in the light of human probabilities and upheld the action of assessing officer. Further aggrieved, the assessee has filed present appeal before Tribunal.
5. We have heard the submission of learned Authorised Representative (ld. AR) of the assessee and the learned Commissioner of Income Tax – Departmental Representative (ld. CIT – DR) for the Revenue. The ld. AR of the assessee submits that assessee has purchased 2,00,000 shares of Marigold Glass Industries Ltd. which was later on converted to Greencrest Financial Services Limited. The assessee purchased share of face value of Rs. 10/- at the premium of Rs. 2.00/-. Thus, the assessee invested Rs. 24,00,000/- for acquisition of 2,00,000 shares. Subsequently, shares were splited into ratio of 1:10. Thus, total share credited to the Demat account of assessee of Rs. 24,00,000 shares. During the year under consideration, the assessee sold 5.87 lac shares which is almost 1/4th total shareholding. The shares were sold on a total consideration of Rs. 3,64,40,750/-. The purchase cost of shares were Rs. 7,04,400/-. Thus, the assessee earned long term capital gain of Rs. 3.57 Crore. The remaining share is still with the assessee. The assessee has not sold such shares as the value has come down substantially. The assessee sold such share through well-known share broker of Bombay Stock Exchange that is Edelweiss Securities Ltd. The assessee paid security transaction tax. The shares were sold through Bombay Stock Exchange. The sale transaction was received in the bank account of assessee. SEBI has taken some action against certain parties and debarred from certain period. However, neither the name of assessee nor the name of broker of assessee in the order of SEBI. There is no allegation against either of assessee or against the broker of assessee. The ld. AR of the assessee submits that on similar set of fact, the Mumbai Tribunal in case of Yogesh P. Thakkar vs DCIT in ITA No. 1605 & 1612/Mum/2021 and in case of Harsha Nitin Thakkar vs DCIT in ITA No. 1606 & 1608/Mum/2021 and in case of Nisha Yogesh Thakkar vs DCIT in ITA No. 1607/Mum/2021 dated 03.02.2023 while considering the similar scrips allow relief to the assessee. Further, Nagpur Bench of Tribunal on similar set of facts in ACIT vs Sudhir Ramswaroop Sarda in ITA No. 103/Nag/2019 dtd. 21.03.2025 allowed relief to the assessee, wherein additions were made on the basis similar allegation based on Investigation Wing, Kolkata in respect of Luminary Technology Ltd.
6. On the other hand, the learned Commissioner of Income Tax – Departmental Representative (ld. CIT–DR) for the Revenue submits that that assessee is beneficiary of capital gain earned on sale of share of penny scrip company are exists only on papers only. The said company had no substantial assets or operational revenue. The price of such scrips is inflated in circular transaction with connivance of broker. The assessee purchased the share at a negligible price and sold at artificially inflated price. The assessee was required to establish that transaction was not prearranged or collusive in nature. The identity of buyer is not provided. The assessee has not demonstrated adequate knowledge of the market and the scrip traded, ruling out any element of blind investment. The failure to substantiate of those elements conclusive indicates that transactions were sham and carried out solely to evade tax by loundering unaccounted income. The action of SEBI is immaterial for the purpose taxation as the Income Tax Department is empowered to assess the genuineness of transaction independently. The misuse of section 10(38) constitutes off course abuse of tax provision and the assessee must be held liable for evade tax. The transaction through banking channel and with share broker is not adequate evidence to prove genuineness, creditworthiness and identity of penny stock company. The Direct evidences are not necessary and test of preponderances of probabilities to be applied in such cases. The AO has brought necessary fact and material made available by Investigation Wing to establish penny stock transaction. The ld. CIT-DR prayed for dismissal of appeal.
7. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by the lower authorities and ld AR of the assessee, before us. We find that to substantiate the transaction of long-term capital gain the assessee submitted that Greencrest Financial Services Limited was a listed company in Bombay Stock Exchange. The assessee furnisheddetails of broker, DPID, client ID, contract number with trade date, order number, trade number, scrip name, quantity of shares sold, rate at which sold, the details of brokerage, and amount of STT paid, service tax. The assessee also furnished bank statement, Demat statement. We find that no finding on such evidences was given by AO. The AO relied upon information of Investigation Wing, Kolkata without providing copy of such report. No opportunity to cross-examination of the person, on whose confession / statement he relied, was provided to the assessee. We find that the assessee discharged his primary onus in providing the necessary details to substantiate the transaction of sale of scrips which were held for more than one year.Once, the assessee discharged his onus, the onus shifts on the AO to investigate the matter further and to bring adverse evidence on record to disprove the evidence filed by the assessee.
8. We find that Hon’ble Gujarat High Court in the case of Himani M. Vakil (2014) 41 taxmann.com 425 (Guj) held that where assessee duly proved genuineness of sale transaction by bringing on record contract notes of sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, Assessing Officer was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. Gujarat High Court in the case of Parasben Kasturchand Kocher (2021) 130 taxmann.com 176 (Guj), also held that when assessee discharged his onus by establishing that transactions were fair and transparent and all relevant details with regard to transfer furnished to Income Tax Authority and the Tribunal have also took the notice of fact that the shares remained in the account of assessee, the assessee also furnished demat account and details of bank transaction about the sale and purchase of shares, the addition was deleted. Further, we find of Hon’ble Jurisdictional High Court in the case of PCIT Vs. Indravadan Jain, HUF in Income Tax Appeal No.454 of 2018 dated 12.07.2023 also held that when AO nowhere alleged that transactions made by assessee with a particular broker or share broker was bogus, merely because investigation was done by SEBI against the broker or its activities, the assessee cannot be said to have entered into ingenuine transaction. In PCIT Vs Mamta Rajiv Kumar Agarwal (2023) 155 taxmann.com 549 (Gujarat) also held that where the assessee had sold the shares and earned LTCG and the AOalleged that transaction was penny stock deal aim at illegitimately claiming LTCG exemption under section 10(38), since there was no allegation on record suggesting the assessee or his broker involved in rigging up the price of scrips, the addition was rightly deleted by Tribunal.We find that assessee made sale of shares through BSE and paid security transaction tax and there is no allegation against the share broker through whom assessee has made sales that they were indulging any price manipulation. Therefore, we do not find any justification in treating the LTCG as unexplained cash credit in absence of any cogent evidence against the assessee specific.
9. We find that recently, the Nagpur Bench of Tribunal on similar set of facts and against the addition based on similar report of investigation wing, in ACIT Vs Shri Sudhir Ramswaroop Mundra in ITA No. 103/Nag/2029 dated 21.03.2025 by referring and relying on decision of Jurisdictional High Court in CIT Vs Shyam R. Pawar (2015) taxmann.com 108 (Bom) allowed similar relief to the assessee. We further find that Mumbai Bench of Tribunal in case of Yogesh P. Thakkar vs DCIT in ITA No. 1605 & 1612/Mum/2021 and in case of Harsha Nitin Thakkar vs DCIT in ITA No. 1606 & 1608/Mum/2021 and in case of Nisha Yogesh Thakkar vs DCIT in ITA No. 1607/Mum/2021 dated 03.02.2023 while considering the similar scrips of Greencrest Financial Services Limited, allowedexemption of capital gain to that assessee. We find that there is no allegation either against the assessee or his share broker in price manipulations of such shares. The assessee has sold through well-known share broker namely; Edelweiss Securities Ltd. Thus, in view of the aforesaid factual and legal discussions, we do not find any justification in making addition of Rs. 3.27 Crore under section 68 against the assessee. In the result, the grounds of appeal raised by the assessee is allowed.
10. In the result, the appeal of assessee is allowed.
Order pronounced on 15/04/2026 as per Rule 34 of Income Tax (Appellate Tribunal) Rules-1963.
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