Case Law Details
Ushma Ashish Shah Vs ITO (ITAT Mumbai)
The Mumbai ITAT partly allowed the assessee’s appeal for AY 2017-18, deleting additions made under Sections 69 and 69C of the Income Tax Act in respect of transactions in shares of a company alleged to be a penny stock. The assessee had filed the return declaring income including short-term capital gains. Subsequently, the assessment was reopened under Section 148 based on information received from the Investigation Wing alleging that the assessee had entered into penny stock transactions involving Kushal Group. During reassessment, the assessee furnished bank statements, computation of capital gains, details of purchase and sale of shares, and other supporting documents. However, the Assessing Officer treated the sale consideration of ₹13,39,008 as unexplained income under Section 69 and made a further addition of ₹26,780 under Section 69C towards alleged commission for accommodation entries. The CIT(A) confirmed both additions.
Before the Tribunal, the assessee contended that no exemption under Section 10(38) had been claimed and that the gains from the impugned share transactions had already been offered to tax as short-term capital gains. It was also submitted that all transactions were executed through recognised banking channels and that no material established any connection with the alleged share price manipulators. The assessee argued that taxing the entire sale consideration under Section 69 would amount to double taxation.
The Tribunal found it undisputed that the assessee had not claimed exemption under Section 10(38) and had already offered the gains from the share transactions to tax under the head “Capital Gains.” It also noted that the purchase and sale of shares had been carried out through regular banking channels and that the Revenue had not produced any material showing that the funds used represented unaccounted money or that the assessee had introduced cash into the transactions. The assessment order contained no evidence linking the assessee with alleged operators involved in share price manipulation. The Assessing Officer had relied only on information received from the Investigation Wing and general observations regarding penny stock transactions without conducting any independent enquiry or producing material specifically implicating the assessee.
The Tribunal held that once the gains arising from the transactions had already been subjected to tax under the head “Capital Gains,” the entire sale consideration could not again be taxed under Section 69 in the absence of cogent evidence establishing that the transactions were sham or fictitious. It observed that the additions were based only on suspicion and surmises without corroborative evidence connecting the assessee to any accommodation entry providers. Accordingly, it directed deletion of the addition of ₹13,39,008 under Section 69 and the consequential addition of ₹26,780 under Section 69C. The grounds challenging the notice issued under Section 148 were kept open. The appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Present appeal filed by assessee arises out of the order passed by NFAC, Delhi [hereinafter referred as “Ld.CIT(A)”], dated 19/12/2025, for A.Y. 2017-18, on the following grounds of appeal :-
“1. INVALID REOPENING UNDER SECTION 147 The reopening of assessment is bad in law and liable to be quashed. The Assessing Officer has merely relied upon information received from the Investigation Wing regarding alleged penny stock transactions. There is no independent application of mind by the Assessing Officer. The reasons recorded do not demonstrate any live nexus between the information received and escapement of income in the hands of the appellant. The reopening is based on general allegations relating to certain scrips without bringing any specific material to show that income chargeable to tax had escaped assessment in the case of the appellant. Further, the approval obtained under section 151 appears to be mechanical and without due satisfaction. In absence of proper satisfaction and independent formation of belief, the assumption of jurisdiction under section 147 is invalid.
2. VIOLATION OF PRINCIPLES OF NATURAL JUSTICE The assessment suffers from serious violation of principles of natural justice. The Assessing Officer relied upon investigation report, alleged SEBI findings and statement of Shri Ashish Panalal Shah. However, copies of these documents were never provided to the appellant. The appellant specifically requested Copy of investigation report Copy of SEBI material relied upon Copy of statement of Shri Ashish Panalal Shah Opportunity to cross examine the said person None of the above were provided. It is settled law that any material used against the assessee must be confronted and opportunity of cross examination must be granted. Addition based on third party statement without cross examination is unsustainable in law.
3. ERRONEOUS ADDITION OF 1339008 UNDER SECTION 68 OR 69 The addition of 1339008 as unexplained investment OR credit is wholly unjustified. The appellant had purchased and sold shares through recognized stock exchange. The transactions were executed through SEBI registered broker HDFC Securities Limited. All payments were made and received through proper banking channels. Shares were held in demat account. The appellant had already declared capital gain of 421840 in the original return and paid tax thereon. Treating the entire sale consideration as unexplained results in double taxation which is impermissible. No defect was found in demat statements, contract notes OR bank statements. The books of account were not rejected. The addition is made only on the basis of suspicion and general investigation report without any direct evidence linking the appellant to any alleged accommodation entry. Suspicion however strong cannot take the place of proof.
4. FAILURE TO ESTABLISH NEXUS WITH ALLEGED OPERATOR There is no material on record to show that the appellant had any connection with Shri Ashish Panalal Shah. No seized document mentions the name of the appellant. There is no evidence of payment of any cash. Mere allegation that certain operators manipulated the market cannot automatically implicate the appellant in absence of specific evidence. Mere abnormal rise in share price cannot render a genuine transaction bogus when the transactions are routed through stock exchange and supported by documentary evidence.
5. ADDITION OF COMMISSION OF 26780 UNDER SECTION 69C The addition of 26780 as alleged commission is purely on estimation at the rate of two percent. There is absolutely no evidence that the appellant paid any commission. There is no identification of any entry operator. There is no evidence of actual cash outflow. Addition cannot be made merely on presumption OR general practice. Such estimated addition without evidence is unsustainable in law and deserves deletion.
6. WRONG APPLICATION OF SECTION 115BBE The provisions of section 115BBE have been wrongly invoked. The appellant had declared capital gain in the return of income. Once income is assessed under the head capital gains, it cannot be taxed again under section 115BBE. The income in question does not legitimately fall under sections 68 to 69D. Therefore the higher rate of tax under section 115BBE is not applicable.
7. MISAPPLICATION OF THEORY OF HUMAN PROBABILITIES The authorities have relied upon decisions relating to human probabilities. However such principle cannot override documentary evidence. All transactions are supported by contract notes, demat statements and bank entries. There is no finding that these documents are false OR fabricated. Suspicion however strong cannot replace evidence.
8. NON CONSIDERATION OF JUDICIAL PRECEDENTS The authorities failed to consider binding and persuasive judicial precedents wherein similar additions in penny stock cases were deleted when transactions were supported by documentary evidence and no direct nexus was established. It is settled principle that once sale proceeds are recorded and offered to tax, the same cannot again be treated as unexplained credit.
9. MECHANICAL CONFIRMATION BY CIT APPEALS The Commissioner Appeals has merely reproduced the findings of the Assessing Officer without independent examination of facts and evidence. Each ground was not adjudicated with proper reasoning. The order is therefore unsustainable.
10. In view of the above submissions it is respectfully prayed that The reopening under section 147 be held invalid and quashed. Alternatively the addition of 1339008 and 26780 be deleted The application of section 115BBE be held inapplicable The appeal be allowed in full The appellant craves leave to add amend OR modify any ground at the time of hearing.”
2. Brief facts of the case as under:-
The assessee is an individual deriving income from interest on savings bank accounts, fixed deposits, loans and income from capital gains. For the year under consideration, the assessee filed the return of income on 25/07/2017 declaring total income of Rs.4,97,240/-. Subsequently, based on information received from the Investigation Wing, the case of the assessee was reopened by issuance of notice u/s 148 of the Act on 30/06/2021.
2.1. As per the information received, the assessee had entered into transactions aggregating to Rs.13,39,000/- in the shares of Kushal Group, a penny stock entity, which was allegedly used for introducing unaccounted income in the guise of exempt long-term capital gains/short-term capital gains and long-term capital loss /short-term capital loss. During the course of reassessment proceedings, the assessee was called upon to furnish details in respect of the transactions undertaken in the shares of Kushal Group.
2.1.1. In response, vide reply dated 02/02/2023, the assessee furnished various details including bank statements, cash book for the relevant year, computation of capital gains, details of purchase and sale of shares of Kushal Group and details of investments made in listed shares during the financial years 2015-16 to 2017-18.
2.2. After considering the submissions and material placed on record, the Ld. AO observed that the assessee failed to furnish any satisfactory explanation justifying the investment and trading in the shares of Kushal Group, which, according to the Ld. AO, was a company having dubious financial credentials and insignificant business operations. The Ld. AO further observed that the assessee utilized penny stock route for introducing unaccounted income into the regular books of account through accommodation entries. Accordingly, treating the impugned transaction of Rs.13,39,008/- as unexplained income, the Ld. AO made an addition u/s 69 of the Act. Further, the Ld. AO estimated commission expenditure allegedly paid for obtaining such accommodation entries at 2% of the transaction value and made a further addition of Rs.26,780/- u/s 69C of the Act.
Aggrieved by the order passed by Ld.AO, assessee preferred appeal before Ld.CIT(A).
2.3. The Ld.CIT(A) after considering the submissions of assessee observed as under:-
“Adjudication: I have considered the Assessment Order and the submission of the appellant. The evidence brought on record by the AO-specifically the SEBI findings on price rigging, the confession of the key operator Ashish Panalal Shah, and the disconnect between the company’s financials and its astronomical share price rise—remains unrebutted. The appellant’s argument that the transaction was done through banking channels does not validate a transaction that is effectively a sham device aimed at tax evasion (Sumati Dayal vs CIT). The Investigation Wing’s report serves as cogent material.
Regarding the quantum, the AO has rightly added the amount reflecting the unexplained investment/credit. The discrepancy in sale consideration alleged by the appellant does not absolve the primary finding that the source of these funds is unexplained. Regarding the commission of Rs. 26,780/- (2%), it is judicially accepted that accommodation entries entail a commission cost. In the absence of specific data. from the appellant, the AO’s estimate is reasonable. These grounds are DISMISSED”
Aggrieved by the order passed by Ld.CIT(A), assessee is in appeal before this Tribunal.
3. Before us, the Ld. AR submitted that the assessee has not claimed any exemption u/s 10(38) of the Act and has offered the capital gains arising from the sale of shares to tax. He drew our attention to pages 8 and 9 of the paper book and submitted that the computation of income clearly reveals that the short-term capital gains arising from the sale of shares have been subjected to tax. He submitted that during the year under consideration, the assessee had traded in various other scrips including Kushal Group and the total short-term capital gain earned by the assessee amounted to Rs.4,21,840/-.
3.1. The Ld.AR further submitted that the copies of the bank statements placed in the paper book clearly demonstrate that the entire transactions relating to purchase and sale of shares were carried out through normal banking channels and, therefore, the provisions of section 68 of the Act have no application to the facts of the present case. He further submitted that there is no material on record to establish that the assessee was involved in the alleged rigging of shares as alleged by the Revenue and that the allegations made are merely based on surmises and conjectures. The Ld.AR submitted that the addition of Rs.13,39,008/- would amount to double taxation, since the resultant gains have already been offered to tax. He thus prayed that the addition be deleted.
3.2. Per contra, the Ld. DR relied upon the orders of the lower authorities.
We have perused the submissions advanced by both sides in light of the records placed before us.
4. It is an undisputed fact that the assessee has not claimed any exemption u/s 10(38) of the Act in respect of the gains arising from the sale of shares of Kushal Group. On the contrary, the gains arising from the impugned transactions have been duly offered to tax as short-term capital gains and the same is evident from the computation of income placed at pages 8 and 9 of the paper book.
4.1. We further note that the purchase and sale transactions in the shares have been carried out through regular banking channels and the relevant bank statements have been furnished before the authorities below. The Revenue has not brought any material on record to establish that the funds utilised by the assessee represented unaccounted money or that any cash was introduced by the assessee for carrying out the impugned transactions.
4.1.1. The assessment order does not reveal any evidence that could lead to the conclusion that the assessee was directly involved in rigging of the share prices of Kushal Group. There is also no material brought on record to establish any connection between the assessee and the alleged operators who were stated to have manipulated the prices of the shares. Except for relying upon the information received from the Investigation Wing, no independent enquiry has been conducted by the Ld. AO to demonstrate that the assessee was a beneficiary of accommodation entries.
4.1.2. We further note that the Ld. AO relied upon general observations regarding the modus operandi adopted in penny stock transactions without bringing any specific material against the assessee. The Revenue has failed to establish that there existed any unaccounted money transaction by the assessee. On the contrary, the assessee furnished documentary evidence in support of the purchase and sale of shares and the resultant gains have already been offered to tax.
4.2. In our considered view, once the gains arising from the impugned transactions have already been subjected to tax under the head “Capital Gains”, the entire sale consideration cannot again be brought to tax u/s 69 of the Act in the absence of any cogent material establishing that the transactions were sham or fictitious. The addition has thus been made merely on suspicion and surmises without any corroborative evidence linking the assessee to the alleged accommodation entry providers.
4.3. We are, therefore, unable to concur with the observations of the authorities below. Accordingly, the addition of Rs.13,39,008/-made u/s 69 of the Act is directed to be deleted. Consequently, the addition made towards alleged commission expenditure at 2% of the transaction value also stands deleted.
Accordingly, the Ground Nos. 3 & 5 raised by the assessee are allowed.
Other grounds raised by assessee pertaining to challenging the issuance of notice u/s 148 of the Act are kept open.
In the result, appeal filed by assessee stands partly allowed. Order pronounced in the open court on 19/06/2026.
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