The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed Revenue’s appeals for Assessment Years (AYs) 2014-15 and 2015-16, holding that a genuine share transaction supported by purchase and sale records, Demat statements and banking documents cannot be treated as an unexplained cash credit merely on the basis of general investigation material concerning alleged penny-stock accommodation entries.
The bench of Pawan Singh (Judicial Member) and Girish Agrawal (Accountant Member) held that where the assessee had discharged the primary burden of establishing the share transactions through documentary evidence, and the Assessing Officer (AO) failed to bring any specific adverse material connecting the assessee with price manipulation or entry operators, addition under Section 68 of the Income Tax Act was not justified.
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The bench held that the consequential addition towards alleged commission expenditure under Section 69C could not survive.
The assessee had filed his return for AY 2014-15 declaring total income of ₹5,67,540. The assessment was subsequently reopened under Section 147 after the AO received information from the Investigation Wing concerning an alleged racket involving bogus entries of long-term and short-term capital gains or losses through penny stocks.
The assessee had earned long-term capital gain from the sale of shares of Lifeline Drugs and Pharma Ltd. The AO treated the transaction as part of the alleged penny-stock arrangement and questioned the genuineness of the capital gain.
According to the assessment order, the assessee had claimed long-term capital gain of ₹23,27,832, which had been claimed as exempt under the then applicable Section 10(38). Following the investigation material, the AO treated the entire sale consideration of ₹24 lakh as unexplained credit under Section 68 and additionally made an estimated addition of 3% as alleged commission expenditure under Section 69C.
Before the CIT(A), the assessee strongly contested the allegation that the transaction was a sham or accommodation entry. He submitted detailed documentary evidence concerning the purchase and sale of the shares.
The record showed that the assessee had originally purchased 15,000 shares at ₹60 per share, involving an investment of ₹9 lakh. Subsequently, the shares were split in a 1:10 ratio, resulting in the assessee holding 1,50,000 shares. Out of these, 10,000 shares were sold during AY 2014-15 for ₹24 lakh, resulting in the claimed long-term capital gain of ₹23,27,832.
The assessee furnished, among other documents, the share application form, purchase and sale broker notes, bank statements evidencing payment and receipt, and Demat statements maintained with Nirmal Bang Securities Pvt. Ltd. The sale was carried out through a stock broker registered with SEBI, and the sale consideration was received through the banking channel.
The assessee also argued that the AO had not conducted any specific enquiry into the documentary evidence submitted by him and had instead relied primarily upon third-party investigation information.
The CIT(A), after considering the submissions and evidence, found that the AO had failed to establish through concrete material that the assessee’s particular transaction was a sham transaction.
The appellate authority noted that the documentary evidence produced by the assessee had not been effectively rebutted by the AO. The CIT(A) also found that the alleged rise in the share price, by itself, could not establish that the assessee was involved in manipulation or had knowledge of any alleged entry-operation mechanism.
Significantly, the CIT(A) recorded that there was no evidence specifically implicating the assessee in the alleged accommodation-entry transaction and that no investigation had been conducted to establish his involvement. On this basis, the addition under Section 68 was deleted.
The CIT(A) also deleted the ₹72,000 addition towards alleged commission under Section 69C, observing that the estimated commission was not supported by evidence and, once the principal Section 68 addition was deleted, the commission addition had no independent basis.
The department contended that the Investigation Wing had carried out a detailed investigation into penny-stock companies allegedly managed by entry operators for providing accommodation entries in the form of bogus capital gains or losses.
The department argued that the assessee’s transaction in Lifeline Drugs and Pharma Ltd. was part of such a mechanism and that the AO had sufficient material to treat the capital gain as bogus.
It was further argued that the assessee had purchased the shares off-market in the form of preferential shares and that the company did not have strong financial results. The Revenue therefore sought restoration of the AO’s additions.
The Tribunal, however, found that the additions had been made solely on the basis of information received from the investigation and that the assessee had produced documentary evidence supporting the transactions.
The Tribunal specifically noted that the assessee had placed copies of his replies before the AO along with supporting evidence, despite the assessment order recording that no reply had been filed.
The Bench observed that the CIT(A) had taken note of the purchase and sale documents, broker notes, bank statements and Demat account records. These documents demonstrated the movement of shares and corresponding financial transactions.
The Tribunal also noted that the AO had not brought any material on record to effectively negate the evidence furnished by the assessee.
A key aspect of the Tribunal’s ruling was its emphasis on assessee-specific evidence.
The Bench referred to decisions of the Gujarat High Court and other courts and tribunals holding that where an assessee establishes the genuineness of a share transaction through contract notes, broker statements, Demat records and banking documents, the transaction cannot be treated as unexplained merely because concerns have been raised regarding the particular scrip or persons associated with it.
The Tribunal referred to Himani M. Vakil, where the Gujarat High Court held that properly documented share transactions could not be treated as unexplained cash credits when the assessee had produced contract notes, broker bank statements and Demat records.
The Bench also relied upon the jurisdictional Bombay High Court decision in PCIT v. Indravadan Jain, HUF, observing that merely because an investigation had been conducted by SEBI against a broker or in relation to its activities, an assessee could not automatically be treated as having entered into an ingenuine transaction when there was no specific allegation that the assessee’s transaction with that broker was bogus.
The Tribunal further relied upon the decision in PCIT v. Mamta Rajiv Kumar Agarwal, where the allegation of a penny-stock transaction aimed at claiming an illegitimate LTCG exemption was not sufficient when there was no material showing the assessee’s involvement in rigging the price of the scrip.
The Tribunal found that the shares had been sold through the Bombay Stock Exchange (BSE) and Securities Transaction Tax had been paid. More importantly, there was no allegation backed by cogent evidence that the assessee himself had acted as an entry provider, exit provider or had participated in price manipulation.
The Bench therefore concluded that there was no justification for treating the LTCG as unexplained cash credit in the absence of specific evidence against the assessee.
The Tribunal also took note of earlier coordinate Bench decisions involving the same scrip, Lifeline Drugs and Pharma Ltd.
It referred to Nitesh Kumar Gadia v. ITO and Praveen/Pravin C. Bokadia v. ITO, in which similar additions relating to transactions in the same scrip had been deleted where the Revenue failed to produce material contradicting the evidence furnished by the taxpayers.
The Tribunal observed that a consistent line of decisions had held that when an assessee discharges the primary onus by furnishing complete evidence and the AO neither properly deals with that evidence nor produces adverse material, reliance merely upon third-party statements or general investigation information cannot justify an addition.
Having upheld deletion of the principal Section 68 addition, the Tribunal also rejected the alleged unexplained commission expenditure under Section 69C.
The Bench observed that there was no evidence establishing that the assessee had actually incurred the alleged expenditure. Therefore, the commission addition could not independently survive.
The Tribunal ultimately affirmed the CIT(A)’s order and dismissed the Revenue’s appeal for AY 2014-15.
For AY 2015-16, where the department had raised similar grounds with variations in the figures involved, the Tribunal followed the principle of consistency and dismissed the appeal as well.
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