INCOME TAX OFFICER, MUMBAI V. BHARATI BHARAT MANEK, MUMBAI

ITA 2279/MUM/2024

AI Insights

The case involves an appeal by the Income Tax Officer against Bharati Bharat Manek, concerning the assessment year 2014-15. The Revenue challenged the order of the Ld CIT(A) which had deleted the additions made by the Assessing Officer (AO) under section 68 and section 69C of the Income Tax Act, related to the sale of shares and estimated commission expenses. The AO had treated the long-term capital gains from the sale of shares as bogus, based on information from the Investigation Wing that the shares were part of a penny stock scheme manipulated to generate bogus capital gains. The Ld CIT(A) found that the assessee had provided sufficient evidence to prove the genuineness of the transactions, which the AO had not adequately addressed.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 471328 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Other Referred Cases: CIT Vs. Mukesh Ratilal Morolia, PCIT Vs Indravadan Jain, HUF, Sri chand Chatrumal HUF vs ACIT, M/S ANDAMAN TIMBER INDUSTRIES V/s CCE, Kamla Devi S. Doshi V/s. The Income Tax Officer Ward 16(3)(1), Shri Sunil Prakash V/s. ACIT -15(2), Manish Kumar Baid Vs ACIT, Kiran Kothari Vs ITO, CIT v. Shyam R. Pawar, PCIT vs. Ziauddin A Siddique
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MONIKA H. PANDE
• Assessee Lawyers: YOGESH THAR
• Keywords: Unexplained cash credit; Cost of acquisition; Capital Gains; Opportunity of cross examination; Penny stocks; Bogus
• Section: 68; 131; 69C

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “B” BENCH : MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI RAJ KUMAR CHAUHAN, JUDICIAL MEMBER ITA No. 2279/Mum/2024 Assessment Year : 2014-15 Income Tax Officer, Second Floor, Kautilya Bhavan, BKC, Bandra East, Mumbai vs. Bharati Bharat Manek, 1001, 10th Floor, Gokul Namiella, Dadabhai Road, Vile Parle, Mumbai PAN : AHTPM1266G (Appellant) (Respondent) For Assessee : Shri Yogesh Thar For Revenue : Ms. Monika H. Pande Date of Hearing : 16-01-2025 Date of Pronouncement : 06-02-2025 O R D E R PER B.R. BASKARAN, A.M : The Revenue has filed this appeal challenging the order dated 08-03-2024 passed by the Ld CIT(A), NFAC, Delhi and it relates to the Assessment Year (AY.) 2014-15. The Revenue is aggrieved by the decision of the Ld CIT(A) in deleting the addition relating to sale of shares made u/s 68 of the Act and also the estimated commission expenses u/s 69C of the Act. 2. The facts relating to the case are discussed in brief. The assessee is an individual. During the year under consideration, the assessee had sold 2 ITA No. 2279/Mum/2024 75,000 shares of M/s First Financial Services Ltd., for a consideration of Rs.2,20,22,488/- and earned long term capital gains of Rs.2,04,69,952/-. The assessee claimed the long term capital gains as exempt u/s 10(38) of the Act. The assessee had purchased the shares of above said company under private placement @ Rs.20/- per shares (Par value Rs.10/- (+) Premium Rs.10/-). According to the assessee, the above said issue price was approved by the BSE. Thus, the purchase cost of the assessee was Rs.15.00 lakhs. Subsequently, the above said shares were sold in various installments for an aggregate consideration of Rs.2,20,22,488/-. 3. The AO received information the Investigation Wing that M/s First Financial Services Ltd., was identified as one of the penny stock company and the prices of its shares were manipulated by a group of brokers/operators in order to generate bogus capital gains. The AO placed reliance on the investigation report and accordingly held that the long term capital gains declared by the assessee is bogus in nature. Accordingly, he assessed the entire sale consideration of Rs.2,20,22,488/- as unexplained cash credit u/s 68 of the Act. The AO also estimated commission expenses that would have been incurred in generation of bogus capital gains @ 1% of the sale consideration and accordingly assessed a sum of Rs.2,20,224/- as unexplained cash credit u/s 68 of the Act. In the appellate proceedings, the Ld CIT(A) deleted both the additions and hence the revenue has filed this appeal. 4. We heard the parties and perused the record. The facts relating to the above said issues have been narrated as under by the Ld CIT(A):- “2. The appellant had purchased shares of First Financial Service Limited for sum of Rs.15,00,000/- (75,000 shares at Rs.20/- each share) and subsequently these shares were sold for sum of Rs.2,20,22,488/-. The resultant capital gains of Rs.2,04,69,952/-was claimed exempted u/s 10(38). The learned AO treated entire sale consideration as bogus and 3 ITA No. 2279/Mum/2024 add to total income as unexplained cash credit u/s 68 of the Income Tax Act. 3. The learned AO alleged it to be penny stock and he claimed that the trading in such stock was controlled by few operators and rise in prices of this stock was artificially created. The learned AO had relied upon investigation undertaken by Kolkata Investigation Directorate wherein it was indicated that First Financial Service Limited was involved in giving bogus long term capital gain/ loss to its beneficiaries. He suspected about the same and presumed that the trading was pre-arranged. He finally concluded assessment by assigning following reasons: Assessee failed to discharge onus of explaining unusual growth in trading volumes of shares of First Financial Service Limited • Assessee was having knowledge about penny stock. Assessee was ignorant about financial health of penny stock company and artificially rigged prices The investigations in the fund flow analysed that cash was routed through many layers of companies.” The transaction were entered with pre-conceived series of steps and true nature of transaction was not present and being artificially structured with intent to evade tax. Revenue cannot accept this make believe arrangement. The learned AO also disallowed commission paid on above transaction for sum of Rs.2,20,224/-. He presumed that the appellant has paid such commission at the rate of 1%.” 4.1. Before the Ld CIT(A), the assessee contended that she has proved the transactions of purchase and sale of shares by adducing various documents and the AO did not find fault with any of those documents. The Ld CIT(A) has discussed about these details as under:- “2. The appellant claimed the transaction to be genuine and filed following documents before learned AO at the time of assessment: • A letter form First Financial Services Ltd confirming allotment of shares Bank statement depicting payments made for purchase of shares along with details of source of investment • Statement of holding shares 4 ITA No. 2279/Mum/2024 • Broker note for sale of shares • Bank statement depicting receipt of money after sale of shares Copy of SEBI order dated 6/9/17 where in after investigation SEBI found that there is no prima facie finding against the appellant for price manipulation in case of First Financials Services ltd. • Further, the appellant vide letter dated 19/12/2016 (at para 1.11) had asked learned AO for cross examination of the person based on whose statements, such claim of bogus sale was upheld.” 4.2. The assessee also contended before the Ld CIT(A) that the AO did not find fault with any of the documents furnished by the assessee. Instead, he has fully placed reliance on the findings arrived at by the Investigation wing in respect of search conducted in the hands of some other person. It was submitted that the assessee was not subjected to any enquiry by the SEBI nor the assessee was found to a part of any groups that were allegedly manipulating the prices. Accordingly, by placing reliance on various case laws on similar issue, the assessee contended before the Ld. CIT(A) that the AO was not justified in disbelieving the transactions of purchase and sale of shares undertaken by the assessee. The assessee also submitted that the AO did not furnish the various documents relied upon by him for taking adverse decision against the assessee. Accordingly, it was contended that the AO could not have placed reliance on those documents which were not confronted with the assessee. 4.3. The Ld CIT(A) was convinced with the contentions of the assessee. Accordingly, he deleted both the additions duly taking support of various judicial decisions. The conclusion reached by the Ld CIT(A) are extracted below:- “CIT Vs. Mukesh Ratilal Morolia (Bombay High Court) ITA no. 456 of 2007, dated: 07.09.2017 5 ITA No. 2279/Mum/2024 “ ….The High court of Bombay upheld the decision of the Tribunal. The tribunal had held that since, the shares were purchased on the floor of stock exchange and not from the broker, payment was made through banking channel, deliveries ere taken in Demat account where shares remained for more than one year, contract notes were issued and shares were sold on the floor of stock exchange, the long term capital gain claimed cannot be treated as accommodation entry…” PCIT Vs Indravadan Jain, HUF Income tax ax Appeal No. 454 of 2018 (Bombay HC) - date of order – 12-07-2023 In the aforesaid case, the Hon’ble Bombay High Court upheld the decision of Hon’ble Mumbai Tribunal, wherein the Tribunal had held that since the shares were purchased on the floor of stock exchange and not from broker, payment was made through banking channel, deliverables were taken in DEMAT account where the shares remained for more than one year, contract notes were issued and the shares were also sold on stock exchange, the longterm capital gains claimed as exempt cannot be treated as accommodation entry. CIT vs. Mukesh Ratilal Marolia (Bombay High Court) INCOME TAX APPEAL NO. 456 OF 200 7 7th September 2011 Long-term capital gains on sale of \"penny\" stocks cannot be treated as bogus & unexplained cash credit if the documentation is in order & there is no allegation of manipulation by SEBI or the BSE. Denial of right of cross- examination is a fatal flaw which renders the assessment order a nullity Sri chand Chatrumal HUF vs ACIT [I.T.A. N o.6537/Mum/2018] “the assessee have filed the best evidence to prove the transaction in question viz. bills, contract notes, demat Statement and the bank account statements to prove the genuineness of the transaction relating in the purchase of Mis. Panchshul Marketing Ltd and thereafter sale of shares [after amalgamation] of Mis KAFL which resulted in LTCG claim of Rs. 19,51,000/-. Therefore, by applying the test of preponderance of probability, the LTCG cannot be disallowed without AO pointing out any infirmities in the evidences produced by assessee, which lll1fortwlately AO could not point out. So the assessee's claim of L TCG need to be allowed.” M/S ANDAMAN TIMBER INDUSTRIES V/s CCE CIVIL APPEAL NO. 4228 OF 2006 Not allowing the assesse to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were 6 ITA No. 2279/Mum/2024 made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assesse was adversely affected Kamla Devi S. Doshi V/s. The Income Tax Officer Ward 16(3)(1), I.T.A. No.1957/Mum/2015 Assessment Year: 2006-07 Bogus penny stocks capital gain: The s. 131 statement implicating the assessee is not sufficient to draw an adverse inference against the assessee when the documentary evidence in the form of contract notes, bank statements, STT payments etc prove genuine purchase and sale of the penny stock. Failure to provide cross-examination is a fatal error Shri Sunil Prakash V/s. ACIT -15(2) I.T.A./6494/Mum/2014, Assessment Year: 2005-06 If the AO relies upon the statement of a third party to make the addition, he is duty bound to provide a copy of the statement to the assesse and afford the opportunity of cross examination. Failure to do so vitiates the assessment proceedings. A transaction evidenced by payment/receipt of share transaction value through banking channels, transfer of shares in and from the Dmat account, etc cannot be treated as a bogus transaction so as to attract s. 68 Manish Kumar Baid Vs ACIT [ITA 1237/Kol/2017] “The enquiry by the Investigation Wing and/or the statements of several persons recorded by the Investigation Wing in connection with the alleged bogus transactions in the shares of KAFL also did not implicate the assessee and/or his broker. It is also a matter of record that the assessee furnished all evidences in the form of bills, contract notes. demat statements and the bank accounts to prove the genuineness of the transactions relating to purchase and sale of shares resulting in LTCG. These evidences were neither found by the ld AD to be false or fabricated. The facts of the case and the evidences in support of the assessee's case clearly support the claim of the assessee that the transactions of the assessee were bonafide and genuine and therefore the ld AD was not justified in disallowing the assessee's claim of exemption under section 10(38) of !.he Act.” Kiran Kothari Vs ITO *ITA 443/Kol/2017+ “we note that the assessee had furnished all relevant evidence in the form of bills, contract notes. demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the Id. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidence in support of the 7 ITA No. 2279/Mum/2024 evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence” In view of the facts, documentary evidences and circumstances of the case and having regard to varied judicial pronouncements including jurisdictional HC and ITAT, I am of the considerate view that the learned AO has not carried out investigation of the fact of the case which are specific to the appellant. The learned AO has also not provided opportunity or any finding in he assessment order, on request of appellant for cross examination which is against found to be principle of natural justice. The SEBI order dated 6/9/2017 clearly states that the appellant was not involved in price manipulation of the script. Further, the appellant has filed all the requisite documents to substantiate genuineness of the sale transaction and in absence of any evidence of involvement of cash in the underlined transaction, the sale consideration received by appellant cannot be treated as bogus. Therefore, the additions made by the learned AO for sum of Rs.2,20,22,488/- and Rs.2,20,224/- on account of sale of shares and commission thereto respectively are deleted.” 5. We notice that the Ld CIT(A) has considered various case laws in order to decide the issues in favour of the assessee. More particularly, the Ld CIT(A) has noticed that the AO did not find fault with any of the documents furnished by the assessee in order to support the claim of purchase and sale of share of M/s First financial services Ltd. The receipt of shares and sale of shares are evidenced by the demat account of the assessee. Further, we notice that the assessee is a regular investor in shares. The documents that were relied upon by the AO were not confronted with the assessee despite being asked for by the assessee. Further, the AO did not establish that the assessee was part of the group that was manipulating the prices of shares. Under these set of facts, we notice that the decision so rendered by the Ld CIT(A) would get support from the decisions rendered by the Hon’ble jurisdictional Bombay High 8 ITA No. 2279/Mum/2024 Court in the case of CIT v. Shyam R. Pawar [2015] 229 Taxman 256 (Bombay) and PCIT vs. Ziauddin A Siddique (Income tax Appeal No. 2012 of 2017 dated 4th March, 2022). 6. In view of the foregoing discussions, we do not find any reason to interfere with the order passed by the Ld CIT(A). Accordingly, we uphold his order. 7. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 06-02-2025 Sd/- Sd/- [RAJ KUMAR CHAUHAN] [B.R. BASKARAN] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 06-02-2025 TNMM 9 ITA No. 2279/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 "