BHAVNA MOTLA ,MUMBAI V. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 19(1), MUMBAI

ITA 5474/MUM/2024

AI Insights

The case revolves around the appeal by Bhavna Motla against the order of the Commissioner of Income Tax (Appeals) which confirmed the additions made by the Assessing Officer regarding unexplained cash credits and unexplained expenditure towards commission payment related to short term capital gains from trading in shares of M/s Comfort Intech Ltd., a penny stock company. The Assessing Officer had reopened the assessment based on information that the assessee traded in shares of a company identified as a penny stock and treated the gains as bogus. The Tribunal, after examining the evidence and the procedures followed, concluded that the assessee had substantiated the genuineness of the transactions and that the additions made were not justified.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 31995 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Other Referred Cases: PCIT Vs. Indravadan Jain, HUF, Hasmukhbhai B Patel (HUF) vs. ACIT, Mrs Rehana Mohammed Ali Gheewala vs. ACIT, Shyam Pawar vs. PCIT, PCIT vs. Ziauddin A Siddique, PCIT vs. Indravadan Jain HUF, Adamine Construction P Ltd vs. Revenue
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MONIKA H. PANDE
• Assessee Lawyers: AJAY R. SINGH; AKSHAY PAWAR
• Keywords: Set aside; Unexplained cash credit; Reopening of assessment; Capital Gains; Penny stocks; Bogus
• Section: 148; 68; 133(6); 69C

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B”, MUMBAI BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA No. 5474/Mum/2024 Assessment Year : 2011-12 Bhavna Motla, Flat No. 32, 38/A, Ashutosh Co Op Hsg Soc., Nepansea Road, Mumbai PAN : AAGPM3774P vs. Asst. Commissioner of Income Tax, Circle-19(1), Piramal Chamber, Lalbaugh, Parel, Mumbai (Appellant) (Respondent) For Assessee : Shri Ajay R. Singh & Shri Akshay Pawar For Revenue : Ms. Monika H. Pande Date of Hearing : 27-01-2025 Date of Pronouncement : 29-01-2025 O R D E R PER B.R. BASKARAN, A.M : The assessee has filed this appeal challenging the order dt.30-08-2024 passed by the Ld. Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [„Ld.CIT(A)‟] and it relates to AY. 2011-12. The assessee is aggrieved by the decision of the Ld.CIT(A) in confirming the validity of reopening of assessment and also in confirming the action of the AO in treating the Short Term Capital Gain declared by the assessee as un-explained cash credit u/s. 68 of the Income Tax Act, 1961 („the Act‟) and also in confirming the addition relating to un-explained expenditure towards commission payment. 2 ITA No. 5474/Mum/2024 2. The facts relating to the case are discussed in brief. The assessee filed her return of income for the year under consideration, declaring a total income of Rs.20,13,807/-. Subsequently, the AO received information that the assessee has traded in the shares of a company named M/s Comfort Intech Ltd., which was identified as a penny stock company. Hence, the AO reopened the assessment of the year under consideration by issuing notice u/s 148 of the Act. During the year under consideration, the assessee had purchased 10,000 shares from stock exchange platform for a sum of Rs.18,60,000/- and sold it in the stock exchange platform for a sum of Rs.29,50,000/-. Accordingly, she declared short term capital gains of Rs.10,90,000/-. 3. The AO, based on the report given by the Investigation wing about the modalities adopted by operators to generate bogus capital gains, took the view that the short term capital gains declared by the assessee is bogus in nature. The Investigation wing, inter alia, had identified certain persons who were purchasing shares sold by the persons like the present assessee. They have been identified as “Exit providers” by the investigation wing. During the course of assessment proceedings, the AO issued notices u/s 133(6) of the Act to some of the exit providers. One of the exit providers was Mala Sheth and the AO noticed that a penalty of Rs.6.00 lakhs has been levied upon her by SEBI and Rs.12.00 lakhs levied upon her husband named Shri Hemanth Seth for indulging in creating artificial market and price manipulations. The AO further relied upon the investigation report, wherein it has been observed that the financials and fundamentals of the above said company did not justify the market price quoted in the stock exchange. Further, it has been reported that the prices were raising upto a point of time and thereafter, it has started falling. Accordingly, the AO took the view that the short term capital gains declared by the assessee is bogus in nature and accordingly assessed the sale value of Rs.29,50,000/- as unexplained cash credit u/s 68 of 3 ITA No. 5474/Mum/2024 the Act. The AO also further took the view that the assessee would have paid commission expenses for procuring bogus short term capital gains. The AO estimated the commission expenses at Rs.88,500/- and assessed the same u/s 69C of the Act. The appeal filed by the assessee before Ld CIT(A) came to be dismissed and hence the assessee has filed this appeal. 4. The Learned AR submitted that the AO has placed his reliance entirely on the report given by the Investigation wing and he did not disprove any of the evidences furnished by the assessee to prove the factum of purchase and sale of shares. He submitted that the shares were purchased and sold through stock exchange. Further, the payment was made/received through banking channel in respect of purchase/sale of shares. Further, the shares have entered into/exited from the Demat account of the assessee upon purchase/sale. Further, it is not an isolated case of transaction of purchase of shares entered by the assessee, i.e., the assessee is a regular investor and is holding shares of other companies. Accordingly, he contended that the AO could not have doubted the genuineness of the purchase and sale of shares. In support of his contentions, the learned AR placed his reliance on the decision rendered by Hon'ble Bombay High Court in the case of PCIT Vs. Indravadan Jain, HUF (Income Tax Appeal No. 454 of 2018 dated 12-07-2023). 5. The Ld D.R, on the contrary, submitted that the AO has conducted enquiries with the exit providers by issuing notice u/s 133(6) of the Act. The AO has found that one of the exit providers have been fined by SEBI also. Further, the fundamentals of the above said company did not justify the prices quoted in the stock exchange. The assessee has made profit of Rs.10.90 lakhs within a period of five months. Further, the detailed report given by the investigation wing with regard to penny stocks would show that the prices of shares of 4 ITA No. 5474/Mum/2024 penny stocks have been manipulated by the brokers and exit providers. Accordingly, the Ld D.R submitted that the Ld CIT(A) was justified in confirming the additions. 6. In the rejoinder, the Ld A.R submitted that the assessee is a regular investor holding shares of more than 3 crores. Further, the assessee has purchased and sold the shares of above said company through stock exchange platform in computer based screen, meaning thereby, the assessee would not know the identity of sellers/buyers of the shares on the other side of the system. Hence, the assessee cannot be found fault with, if any of the so called exit providers have been fined. It is not the case of the AO that any of such exit providers have identified the assessee as part of their group. He further submitted that the AO did not find fault or deficiency with any of the documents furnished by the assessee to prove the factum of purchase and sale of shares. Further, the AO has not shown that the assessee has carried on the purchase and sale of shares of above said company in connivance with the persons who were rigging the prices. Accordingly, he submitted that the Ld CIT(A) was not justified in confirming the additions made by the AO. The Ld A.R also relied upon the decision rendered by the co-ordinate benches in the cases of Hasmukhbhai B Patel (HUF) (ITA No.699 to 702/M/2023 dated 28-08-2023) and ACIT vs. Mrs Rehana Mohammed Ali Gheewala (Legal heir of Mohammed Ali Ebrahim Gheewala) (ITA No.1487 &1503/M/2024), wherein the additions made in respect of sale of shares of M/s Comfort Intech Ltd has been deleted. He submitted that the Tribunal, in the above said cases, has relied upon the decisions rendered by Hon‟ble Bombay High Court in the cases of Shyam Pawar (54 taxmann.com 108); PCIT vs. Ziauddin A Siddique (Income tax Appeal No.2012 of 2017 dated 4th March, 2022) and PCIT vs. Indravadan Jain (HUF). 5 ITA No. 5474/Mum/2024 7. We heard rival contentions and perused the record. We notice that the AO has primarily placed reliance on the report given by the Investigation wing of the Income tax department, Kolkata in order to arrive at the conclusion that the short term capital gains reported by the assessee is bogus in nature. We notice that the investigation report prepared by Investigation wing, Kolkata is a generalized report with regard to the modus operandi adopted in manipulation of prices of certain shares and generation of bogus capital gains. We notice that the AO has placed reliance on the said report without bringing any material on record to show that the transactions entered by the assessee were found to be a part of manipulated transactions, i.e., it was not proved that the assessee has carried out the transactions of purchase and sale of shares in connivance with the people, who were involved in the alleged rigging of prices. The Ld A.R also submitted that the regulator of stock market SEBI has not conducted any enquiry against the assessee. 8. We notice that the assessee has furnished reply to the notice issued by the AO and the AO could not find any adverse features from the said reply. We also notice that the assessee has - (a) purchased and sold these shares by paying consideration through banking channels and through stock exchange platform. (b) the shares were received and issued through the Demat account of the assessee. We notice that the assessee is a regular investor in shares. Further, the AO has not found any defect/deficiencies in the evidences furnished by the assessee with regard to purchase and sale of shares. Further, the AO has not brought on record any material to show that the assessee was part of the group which involved in the manipulation of prices of shares. The assessee has purchased and sold in the same year. 6 ITA No. 5474/Mum/2024 Accordingly, she has declared short term capital gains, which is otherwise taxable. Hence, there is no reason to suspect the purchase and sale of shares undertaken by the assessee. 9. We noticed that the AO did not establish any link between the assessee and the reports of investigation wing. At this stage, we may refer to the decision rendered by the Hon‟ble Supreme Court in the case of Adamine Construction P Ltd (99 taxman 45), wherein, while dismissing the appeal of Revenue, the Hon‟ble Supreme Court has referred to the following observations made by the Hon‟ble Delhi High Court:- “What is evident is that the AO went by only the report received and did not make the necessary further enquiries – such as into the bank accounts or other particulars available with him but rather received the entire findings on the report, which cannot be considered as primary material. The assessee had discharged the onus initially cast upon it by providing the basic details which were not suitably enquired into by the AO.” Further, the facts available in the present case are that the shares were purchased and sold through the stock exchange platform. In the case of PCIT vs. Indravadan Jain HUF (ITA No.454 of 2018 dated 12th July, 2023), the Hon‟ble Bombay High Court held as under:- “….The CIT(A) came to the conclusion that respondent bought 3000 shares of RFL, on the floor of Kolkatta Stock Exchange through registered share broker. In pursuance of purchase of shares the said broker had raised invoice and purchase price was paid by cheque and respondent’s bank account has been debited. The shares were also transferred into respondent’s Demat account where it remained for more than one year. After a period of one year the shares were sold by the said broker on various dates in the Kolkatta Stock Exchange. Pursuant to sale of shares the said broker had also issued contract notes cum bill for sale and these contract notes and bills were made available during the course of appellate proceedings. On the sale of shares respondent effected delivery of shares by way of Demat instruction slips and also received payment from Kolkatta Stock Exchage. The cheque received was deposited in respondent’s bank account. In view thereof, the CIT(A) found there was no reason to add the capital gains as unexplained cash credit under section 68 of the Act. The Tribunal while dismissing the appeals filed by the Revenue 7 ITA No. 5474/Mum/2024 also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange. The ITAT therefore, in our view, rightly concluded that there was no merit in the appeal.” The facts available in the instant case are similar to the above said case. Accordingly, following above said decision, we hold that, in the facts and circumstances of the instant case, there is no reason to suspect the genuineness of purchase and sale of shares of M/s Shreenath Commercial and Finance Ltd. Accordingly, we set aside the order passed by the Ld CIT(A) on this issue and direct the AO to delete the addition of sale proceeds of shares made. Since the above said addition is deleted, the addition relating to alleged expenses in procuring bogus long term capital gain is also liable to be deleted. We order accordingly. 10. The assessee has also challenged the validity of reopening of assessment. Since we have deleted both the additions, the above said legal issue is rendered academic in nature. Accordingly, we do not adjudicate the same and leave it open. 11. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 29-01-2025 Sd/- Sd/- (SAKTIJIT DEY) (B.R. BASKARAN) VICE PRESIDENT ACCOUNTANT MEMBER Mumbai, Date: 29-01-2025 TNMM 8 ITA No. 5474/Mum/2024 Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT, Mumbai 5) Guard file By Order Dy./Asst. Registrar I.T.A.T, Mumbai "