Hemant Devji Thakkar HUF Vs Assessing Officer (ITAT Mumbai)
Penny Stock Alert Cannot Justify Adding Entire Share Sale Value Under Section 68: Mumbai ITAT
The dispute
In Hemant Devji Thakkar HUF v. Assessing Officer, the Mumbai Bench of the Income Tax Appellate Tribunal examined an addition of ₹2,23,345 under section 68 for assessment year 2012–13. The amount represented the stated sale value of shares in Aarya Global Shares and Securities Ltd., a company identified in investigation material as a penny stock allegedly used for accommodation entries.
The Tribunal held that the investigation material called for scrutiny, but the Assessing Officer had not connected the assessee’s particular trades to any manipulation. He had also failed to examine the assessee’s central explanation: most of the stated sale value came from same-day trades settled on a net basis. The Tribunal directed deletion of the entire addition. :chatgpt-content-reference{index=”0″}
How the assessment arose
The HUF filed its original return declaring income of ₹1,82,391. Following information from the Investigation Wing about dealings in Aarya Global shares, the Assessing Officer reopened the assessment. His order discussed the company’s finances, trading volumes, share price movement and the general method by which penny stock transactions could be used to generate artificial gains or losses.
The Assessing Officer recorded that the assessee had purchased 17,548 shares for ₹4,07,900 and sold 9,048 shares for ₹2,23,345 during financial year 2011–12. He treated the entire sale value as an unexplained credit under section 68, principally because the trades involved the identified scrip. The Commissioner of Income Tax (Appeals) confirmed the addition, finding the assessee’s explanation unacceptable in light of the surrounding circumstances and human probabilities.
The figures behind the sale value
Before the Tribunal, the assessee explained that ₹2,23,345 was an aggregate contract value, comprising two different types of transaction. Shares purchased and sold on the same day had a purchase value of ₹2,03,119 and a sale value of ₹2,14,862, producing a speculative profit of ₹11,743. A separate delivery-based transaction involved 500 shares bought for ₹12,174 and sold for ₹8,483, producing a short-term capital loss of ₹3,691.
According to the assessee, the same-day trades were settled through the broker by payment of the difference. Their gross sale value was therefore not received as a separate sum. The assessee said the profit and loss were reflected in its returns and relied on broker documents, bank records, demat records and tax computations. It argued that neither tax authority had identified a defect in those records or established that the gross value of the same-day sales was an unexplained credit.
Why the Tribunal rejected the addition
The Tribunal focused on what amount had actually been credited and how the assessee had explained it. Section 68 required examination of the sum sought to be taxed and its nature and source. Yet the Assessing Officer had not reconciled the proposed addition with the claim that the same-day trades were settled by net differences. Nor had he separately determined the result of the delivery-based sale.
The Bench was careful about the evidentiary limits on both sides. Broker statements, demat records and bank entries do not automatically establish genuineness. Equally, a gross contract value cannot be treated as an unexplained receipt without addressing a specific explanation that the contract was settled by payment of the difference. The assessment order did not carry out that inquiry.
The Assessing Officer’s discussion of suspicious price movement also lacked a clear link to these trades. Part of his analysis concerned the period 17 August 2011 to 9 March 2015, while the assessee’s identified transactions were in June and July 2011. The order did not find that the assessee, its broker or an identified counterparty participated in the alleged arrangement, or that someone routed the assessee’s cash back through the broker.
The role of the earlier Aarya Global decision
The Tribunal also considered ITO v. Champalal Gopiram Agarwal, ITA No. 592/Ahd/2020, order dated 23.12.2022, a coordinate bench decision involving Aarya Global shares. That decision required specific evidence before an assessee’s gain or loss could be characterised as bogus on the basis of an alleged general modus operandi. The Gujarat High Court had declined to interfere with its fact-based conclusion.
The Mumbai Bench applied that reasoning to the findings in this case. It did not declare that every trade in the scrip was genuine. It found that the general investigation account had not established collusion in this assessee’s transactions, while the authorities had left the explanation for the composition and settlement of ₹2,23,345 unresolved.
Decision and author’s comment
The Tribunal set aside the appellate order and directed the Assessing Officer to delete the ₹2,23,345 addition. The assessee’s appeal was allowed; the matter was not sent back for another examination.
Author’s comment: The decision turns on the difference between a warning signal and proof of a taxable credit. Investigation findings may justify close scrutiny of a scrip, but an addition under section 68 must still be tied to the assessee’s entries and the actual transaction mechanics. Here, the authorities taxed the full stated sale value without resolving whether most of it was ever received as a gross amount.
Cases Discussed
- Principal Commissioner of Income Tax v. Shodiman Investments (P.) Ltd., ITA No. 1297 of 2015 (Bombay High Court)
- ITO v. Champalal Gopiram Agarwal, ITA No. 592/Ahd/2020, order dated 23.12.2022 (ITAT Ahmedabad)
- PCIT v. Champalal Gopiram Agarwal, R/Tax Appeal No. 366 of 2023, order dated 25.07.2023 (Gujarat High Court)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal by the assessee is directed against the order dated 15.01.2026 passed by the learned Additional/Joint Commissioner of Income Tax (Appeals)-2, Ahmedabad [hereinafter referred to as “the CIT(A)”], for assessment year 2012-13. The impugned appellate order confirms an addition of Rs. 2,23,345/- made under section 68 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], in the assessment order dated 18.12.2019 passed under section 144 read with section 147 of the Act.
2. The assessee has raised the following grounds of appeal:
1. The learned Assessing Officer erred in treating sales consideration of Rs. 2,23,345/- arising on the sale of shares of Aarya Global Shares & Securities Ltd also named as Pee Jay International Ltd and also Kuvam International Fashions Ltd as concealed income, without appreciating the fact that every sales has corresponding purchases and it is only after deducting purchase cost from the sale proceeds that Profit/Loss is determined.
2. The learned Assessing Officer ought to have gone through the details of Sales Value of Rs. 2,23,345/- out of which Rs. 2,14,862/- represent sale value of the shares purchased on the same day for Rs. 2,03,119/- thereby resulting into speculation profit of Rs. 11,743/- (2,14,862 – 2,03,119).
3. The learned Assessing Officer ought to have gone through the details of Capital gain which reflects that only 500 shares were purchased for Rs. 12,174/- which were later on sold for Rs. 8,483/- thereby resulting into short term capital loss of Rs. 3,691/-. The Assessing Officer as well as learned CIT (A) has completely ignored documentary evidences.
4. The learned Assessing Officer erred in law and on facts by ignoring the documentary evidence submitted during assessment. The Assessing Officer failed to appreciate that the transactions were genuine, as the shares were purchased and sold through a reputed SEBI-registered share broker on the Bombay Stock Exchange (BSE) platform, and all sale considerations were received through regular banking channels in the ordinary course of business.
5. The learned Assessing Officer erred in law and on facts by treating the sale consideration of Rs. 2,23,345/- as unexplained credit under Section 68, despite the appellant having established the identity, creditworthiness, and genuineness of the transaction. The Assessing Officer failed to appreciate that the nature and source were fully substantiated by documentary evidence, including contract notes, demat statements, and bank records, proving the trade occurred on a recognised stock exchange platform through a SEBI-registered broker.”
6. The learned Assessing Officer ought to have gone through the evidences produced before about the sale proceeds of Rs. 2,23,345/- before adding Rs. 2,23,345/- u/s 68 as the said evidences clearly explains the nature & source of the receipt.
7. The learned Assessing Officer with a prejudiced mind has applied his mind towards information received on SEBI about dealing in penny stock and price rigging and correlated the transaction of your appellant with the same i.e. he has acted on borrowed findings. He has not made an independent enquiry.
8. The learned Assessing Officer failed to appreciate that the nature of transactions done by your appellant were not at all with the intention to derive tax free income.
9. The learned Commissioner of Income Tax (Appeals) also erred in not going into the details of transaction and with a prejudiced mind dismissed the appeal of your appellant.
10. The Appellant, therefore, prays before Your Honour that the addition of Rs. 2,23,345/- be deleted in its entirety, as the same is arbitrary, unjustified, and based on mere surmises and conjectures rather than any concrete evidence. The learned Assessing Officer and CIT(A) erred by ignoring the overwhelming documentary evidence placed on record and by failing to point out any specific defect in the same. The impugned order, being passed without proper application of mind and in total disregard of the facts and explanations provided, deserves to be set aside in the interest of justice.
11. The Appellant craves leave to add/alter any grounds of appeal on or before hearing of the appeal.
3. Facts of the case are such that the assessee is a Hindu undivided family. It filed its original return on 30.07.2012 declaring total income of Rs. 1,82,391/-. According to the assessment order, the return disclosed income from house property, short term capital gains and other sources, and claimed deductions under Chapter VI-A.
4. The Assessing Officer received information from the office of the DDIT (Investigation), Unit-8(2), Mumbai, by letter dated 22.10.2018 concerning transactions in shares of Aarya Global Shares and Securities Ltd., scrip code 531731. The information described the company as a penny stock allegedly used to provide accommodation entries in the form of capital gains or losses. The assessment order records the Assessing Officer’s view that the assessee had traded in that scrip during financial year 2011-12. In narrating the information leading to reopening, it refers to a sale value of Rs. 2,23,454/-.
5. After obtaining approval under section 151(1), the Assessing Officer issued notice under section 148 dated 29.03.2019. The assessee filed a return in response on 24.04.2019 declaring the same total income of Rs. 1,82,391/-.
6. In the assessment order, the Assessing Officer discussed the company’s history, financial results, share price movement, trading volume, certain observations attributed to SEBI, and the general manner in which accommodation entries may be arranged through penny stocks. The show cause notice proposed to treat the assessee’s transaction as a bogus capital gains transaction and to add Rs. 2,23,454/- under section 68.
7. The Assessing Officer recorded that, on the basis of the assessee’s submission and information gathered from third parties, the assessee had purchased 17,548 shares for Rs. 4,07,900/- during financial year 2011-12 and sold 9,048 shares for Rs. 2,23,345/- during that year. He rejected the assessee’s explanation on the ground that it had transacted in the identified scrip. The entire stated sale proceeds of Rs. 2,23,345/- were added under section 68, without a separate determination of the result of the individual transactions. Total income was assessed at Rs. 4,05,740/- after rounding.
8. The assessee challenged the addition before the learned CIT(A). Its explanation was that the figure adopted by the Assessing Officer comprised different transactions: shares bought and sold on the same day, which were stated to have yielded speculative profit, and a delivery based sale resulting in a short term capital loss. The assessee contended that the same day trades were settled by payment of the difference, that their gross sale values were not received as such, and that the relevant profit and loss had been disclosed. It also referred to broker statements and other transaction records.
9. The learned CIT(A) dismissed the appeal. He relied upon the investigation information, the financial and price analysis of the company, and the general description of the alleged accommodation entry arrangement in the assessment order. He held that the assessee’s explanation about speculative settlement and receipt of only the net difference was unacceptable in light of the surrounding circumstances and human probabilities. He further held that contract notes, demat statements and bank entries did not establish genuineness when the transaction chain was found to be manipulated. Accordingly, he confirmed the addition of Rs. 2,23,345/- and dismissed the appeal.
10. Before us the learned Authorised Representative (AR) submitted that the lower authorities had treated the aggregate sale value as unexplained income without determining what the assessee had actually received or earned. Referring to the transaction summary, he submitted that shares purchased and sold on the same day had an aggregate purchase value of Rs. 2,03,119/- and sale value of Rs. 2,14,862/-, giving speculative profit of Rs. 11,743/-. He further submitted that 500 shares acquired for Rs. 12,174/- were sold for Rs. 8,483/-, giving a short term capital loss of Rs. 3,691/-. According to him, the speculative profit and the loss were reflected in the returns, including the return filed in response to notice under section 148.
11. The learned AR explained that the speculative transactions were settled by the broker on a net basis. He referred to the broker’s transaction documents at paper book pages 103 to 114, the bank records at pages 121 to 127, the demat records at pages 128 to 134, and the transaction and tax computations referred to at pages 135 to 137. He identified Pinnacle Forex & Securities Pvt. Ltd. as the broker. His submission was that the Assessing Officer had not identified a defect in these records or demonstrated that the gross sale value of the same day transactions had been received as an unexplained credit.
12. The learned AR further submitted that the Assessing Officer’s discussion of the scrip’s later price movement and the general modus operandi did not establish the assessee’s participation in price manipulation. He pointed out that the assessee’s stated transactions occurred between June and July 2011, whereas part of the Assessing Officer’s price analysis expressly referred to a period commencing on 17.08.2011. He relied upon the decisions cited in his written submission, particularly those concerning transactions in the same scrip. He also cited the decision of Hon’ble High Court of Bombay in case of Principal Commissioner of Income Tax v. Shodiman Investments (P.) Ltd. (ITA No.1297 of 2015) in support of his submission concerning reliance on investigation information. The learned AR also relied on the decision of Co-ordinate Bench in ITO v. Champalal Gopiram Agarwal, ITA No. 592/Ahd/2020, order dated 23.12.2022, where the Bench considered dealings in Aarya Global Shares and Securities Ltd. and gave relief to the assessee.
13. The learned Departmental Representative relied upon the assessment order and the order of the learned CIT(A). He supported the addition of Rs. 2,23,345/- under section 68.
14. We have considered the rival submissions and the material placed before us. The question is whether the Assessing Officer was justified in treating the entire stated sale value of Rs. 2,23,345/- as unexplained income under section 68. The answer requires examination of the assessee’s transactions and the explanation of the nature and source of the amount sought to be added. The identification of a scrip in an investigation report is relevant information, but it does not, by itself, determine the character of every transaction entered into by every person who traded in that scrip.
15. Section 68, as applicable to the year under consideration, concerns a sum found credited in the assessee’s books for which no satisfactory explanation of its nature and source is offered. It follows that the credit sought to be taxed and the explanation concerning it must be examined. The subsequent amendments concerning specified classes of credits do not determine this appeal concerning assessment year 2012-13.
16. In the present case, the Assessing Officer himself recorded purchases of shares for Rs. 4,07,900/- and sales of 9,048 shares for Rs. 2,23,345/-. He did not reject a specified purchase as fictitious, identify an unexplained credit corresponding to each disputed trade, or find that an identified person returned the assessee’s cash through the broker. His stated reason for rejecting the reply was that the assessee had transacted in the scrip under investigation. The order does not reconcile that conclusion with the assessee’s explanation that a substantial part of the gross sale figure related to same day trades settled by net differences.
17. The distinction is material. The assessee’s transaction summary describes same day purchases of Rs. 2,03,119/- and sales of Rs. 2,14,862/-, resulting in a difference of Rs. 11,743/-. It describes a separate delivery based sale of Rs. 8,483/- against cost of Rs. 12,174/-. We do not treat a transaction as genuine merely because a broker statement, demat statement or bank entry is produced. Equally, the gross value of a contract cannot be treated as an unexplained receipt without addressing a specific explanation that the contract was settled by payment of its difference. The Assessing Officer did not make that enquiry in his concluding findings.
18. The Assessing Officer’s analysis of the company’s financial position, trading volume and reported price movement may warrant scrutiny of an assessee’s claim. In this assessment, however, the discussion of the price movement over the period 17.08.2011 to 09.03.2015 has not been related to the assessee’s identified trades in June and July 2011. Nor does the assessment order record a finding that the assessee, its broker or an identified counterparty participated in the alleged arrangement. The learned CIT(A) adopted the general investigation findings without resolving the assessee’s distinct explanation concerning same day settlement and the separate delivery-based transaction.
19. In ITO v. Champalal Gopiram Agarwal, ITA No. 592/Ahd/2020, the Co-ordinate Bench considered dealings in Aarya Global Shares and Securities Ltd. It observed in paragraph 9.2:
“In our view, the income generated by the assessee cannot be held bogus only on the basis of the modus operandi, generalisation, and assumptions of certain facts. In order to hold income earned or loss incurred by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stock brokers for such an arrangements. In absence of such finding, no adverse inference can be drawn against the assessee.”
20. The bench held that a general account of a modus operandi could not, without an assessee-specific finding, establish the alleged collusion in the transactions before it. The Gujarat High Court, in PCIT v. Champalal Gopiram Agarwal, R/Tax Appeal No. 366 of 2023, order dated 25.07.2023, declined to interfere with that fact-based conclusion. Its order records:
8. The learned tribunal has also observed that the respondent had successfully discharged the initial burden cast upon it under the provisions of section 68 of the Act. It is not in dispute that the shares of the aforesaid two companies were purchased online and the payments were made through banking channel and the shares were dematerialized and the shares have been routed from demat account and the consideration was also received through bank channels. The AO does not have any independent source or evidence to show that there was an agreement between the assessee and any other party. The learned tribunal has also observed that in absence of any specific finding against the assessee, the assessee cannot be held to be linked to the wrong acts merely on the basis of surmises and assumptions.
21. The High Court’s decision affirms the Tribunal’s conclusion on the evidence in that case. We apply its reasoning to the particular findings, and absence of findings, in the present assessment.
22. We accordingly find that the Assessing Officer’s conclusion does not establish why Rs. 2,23,345/- in its entirety was chargeable under section 68. The learned CIT(A) did not cure that deficiency by addressing the composition of the amount or the asserted net settlement. The addition rests on the characterisation of the scrip and a general account of accommodation entries, without a finding connecting the assessee’s particular trades to such an arrangement or demonstrating that the stated gross sale value represented an unexplained sum credited to it. On the facts and findings recorded in the orders under appeal, the addition cannot be sustained.
23. We, therefore, set aside the order of the learned CIT(A) on this issue and direct the Assessing Officer to delete the addition of Rs. 2,23,345/- made under section 68. Grounds 1 to 10 are allowed to that extent. Ground 11 is general and requires no separate adjudication.
24. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 28.09.2026.
