ITO, WARD 16(2)(1), MUMBAI, MUMBAI V. LAXMILAL SETHIA, MUMBAI

ITA 588/MUM/2025

AI Insights

The case revolves around the reassessment of Laxmilal Sethia for the assessment year 2011-12, where the Income Tax Officer (ITO) had made an addition of Rs. 9,47,177 as unexplained cash credit under section 68 of the Income Tax Act, 1961, concerning long-term capital gains from transactions in penny stocks. The CIT(A) later deleted this addition, leading to the Revenue's appeal. The Tribunal examined the procedural and substantive aspects of the reassessment, including the legality of the notice under section 148 and the validity of the additions made. The Tribunal's decision was influenced by various judicial precedents and the lack of substantial evidence from the Revenue to support their claims of tax evasion through these transactions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 397113 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 2011-2012
• Other Referred Cases: Pr. CIT v. Ziauddin A Siddique, PCIT vs. Indravadan Jain HUF, CIT vs. Shyam R. Pawar
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reassessment proceedings; Question of law; Unexplained cash credit; Income from undisclosed sources; Reopening of assessment; Capital Gains; Principle of natural justice; Tangible material; Borrowed satisfaction; Penny stocks; Bogus
• Section: 148; 143(3); 68

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 588/MUM/2025 Assessment Year: 2011-12 Income Tax Officer, Ward 16(2)(1), Room No, 443, Aayakar Bhawan, New Marine Lines, Mumbai-400020. Vs. Laxmilal Sethia Flat No. 502, Samatha Complex, Ostwal Tower TPS-3, Shimpoli Road, Borivali West, 400092. (PAN: AADPS1536L) (Appellant) (Respondent) C.O No. 59/MUM/2025 (Arising out of ITA No. 588/MUM/2025) Laxmilal Sethia Flat No. 502, Samatha Complex, Ostwal Tower TPS-3, Shimpoli Road, Borivali West, 400092. (PAN: AADPS1536L) Vs. Income Tax Officer Ward 16(2)(1), Room No, 443, Aaykar Bhavan, New Marine Lines, Mumbai-400020. (Appellant) (Respondent) Present for: Assessee : Shri. Laxmilal Sethia, Assessee in person Revenue : Shri. Nihar Ranjan Samal, Sr. DR Date of Hearing : 19.03.2025 Date of Pronouncement : 27.05.2025 2 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the Revenue and Cross Objection filed by the assessee are against the order of Ld. CIT(A)-4, Hyderabad, dated 29.11.2024 passed against the assessment order of Income Tax Officer, 16(2)4), Mumbai, u/s. 143(3) r.w.s 147 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2011-12. 2. Grounds taken by Revenue are reproduced as under: 1. Whether the learned ADDL/JCIT(A) erred in deleting the addition of Rs. 9,47,177/- made by the Assessing officer on account of unexplained cash credit under section 68 of the Income Tax Act, 1961, in respect of long-term capital gains claimed by the assessee from transactions in penny stocks, despite the Assessing Officer's findings that the transaction were colorable devices intended to evade tax?\" 2. Whether, the ADDL/JCIT(A) erred in holding that the assessee has submitted all the relevant documents viz. purchase invoice, demat statement, bank statement etc., to prove the genuineness of the transaction of his claim of LTCG of 9,47,177/- and thereby deleted the addition made by treating it as genuine without appreciating the fact that the said claim of LTCG was from sale of shares of penny stock company and that the assessee has done all necessary paper work as is done in most of such transactions of penny stock companies and that it is the part of modus-operandi followed by the operators. 2.1. Grounds taken by assessee are reproduced as under: “ GROUND No. 1 The Id. Add Jt. CIT appeal have erred in not adjudicating first ground of my appeal. Ground 1 was: On the facts and in circumstances of the case and in law, learned income tax officer, ward 16.2.4 Mumbai have erred the serving notice under section 148 of the income tax act, 1961, and reopening the case without sufficient reasons and the reasons assigned in the notice are wrong and contrary to income tax act and rules. GROUND No. 2 The Ld. AO erred in assessing income under section 147 of income tax act while additions are made based on search, seizure and investigations done at third party and the results of such search, seizure and investigations were never disclosed to assessee, the assessment should have been under section 153C of the act. 3 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 GROUND No.3 The reopening of assessment was illegal ab intio on following grounds i) Reasons for reopening was not recorded prior to issue of notice u/s 148 of the Act. ii) Reopening was done based on suspicion and for further investigation. iii) There was no tangible material on date of issue of notice u/s 148 of the Act. iv) No enquiry was made prior to issue of notice u/s 148 of the Act. v) No approval u/s 151 was obtained prior to issue of notice u/s 148 of the Act. vi) Non supply of Verbatim copy of reasons for reopening. vii) Notice issued based on borrowed satisfaction, in mechanical way. without applying independent mind by Ld. AO. GROUND No. 4 The principles of natural justice were violated by Ld. AO as under: i. Statements of third party were used to pass assessment order but copy of the same were not provided to the assessee and no cross examination were allowed. In fact, no such statement of any third party exists in file of Ld.AO. ii. The reopening is based on some report of Investigation department of Kolkata BUT NO SUCH report or any part of such report. which used against assessee, is available on record of the Ld. AO and the copy of the same was never provided to the assessee. GROUND No. 5 The Ld. AO not followed procedure prescribed by ITAT Mumbai in Motilal R. Todi vs. ACIT and Supreme court directives. GROUND No. 6 Non application of mind by Ld. AO in following manner i. Incorrect data is used for reopening which shows non-application of mind by AO. ii. My ITR were not seen or referred by Ld. AO prior to issue of notice and she was not sure if I have filed return or not. 4 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 GROUND No. 7 Ld. AO, for rejection of objections, used material and does which were not on record on date of issue of notice u s 148 of the Act and rejected my objections in a mechanical manner, within an hour of my filing of it, without giving any reason. GROUND No. 8 No notice u/s 143.2 of the Act was issued after rejections of my objections. GROUND No. 9 Show Cause notice was issued for rejection of Short Term Capital Gain but rejected Long Term capital gain. GROUND No. 10 The Ld. AO has not found any defect or deficiency in various documents and evidences submitted in respect my claim of LTCG. She has not rejected any of my submissions and documents. GROUND No. 11 Two Notices u/s 142.2 are issued but both are illegal and invalid. First one is issued for A Y 2014 15 while reopening was for AY 2011 12. The second notice the AO has not asked for any information. GROUND No. 12 The Ld. AO erred in using Information related to some other assessees against me for making additions. GROUND No. 13 The Ld. AO has levelled several false allegations against me, for making additions, without any proof. GROUND No. 14 The Ld. AO erred in making additions based on assumptions, presumptions, suspicions and surmises. GROUND No. 15 The Ld. AO erred in linking me to dubious transaction or price rigging without having any evidence of linking me to such acts. 5 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 3. Facts of the case as culled out from the records are that assessee filed his return of income on 25.02.2012, reporting total income at Rs.2,57,050/- which included profits and gains of business and profession of Rs.1,41,631/-, short term capital gain of Rs. 38,516/- and income from other sources Rs.77,899/-. Assessee also reported long term capital gain on sale of listed shares of NCL Research, a listed company, of Rs.9,47,177/- which was claimed exempt u/s. 10(38). 3.1. It came to the knowledge of ld. Assessing Officer that assessee is one of the beneficiaries, for the bogus long term capital gain booked by him, upon dealing in script of NCL research for which Kolkata investigation Directorate had undertaken investigation into several penny stock cases and had found a modus operandi involving operators and intermediaries. Reassessment proceedings were initiated by issuing notice u/s. 148, on 31.03.2016. Assessee had objected on the said proceedings which were disposed of by the ld. Assessing Officer. 3.2. In the assessment proceedings, ld. Assessing Officer noted that total trade value of NCL Research script by the assessee is Rs.10,03,400/-. Assessee had purchased 10,000 shares of this script, 02.04.2008 at the rate of Rs. 2.25 per share, for which payment was made by cheque. There was no preferential allotment of these shares, as they were purchased from another shareholder. Statement of the assessee was recorded by the ld. Assessing Officer during the course of assessment. It is important to note that assessee is a qualified professional as a Chartered Accountant and is aged 63 years, as noted in his statement. Assessee stated that he is a regular investor in the share market for last thirty years and holds two DEMAT accounts, one with Corporation Bank and another with Nirmal Bank Securities Private 6 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 Limited. He provided a detailed list of shares in which he has made investments. He also submitted copies of his DEMAT account to demonstrate holding of shares of various scrips as an investor. Based on his statement, he also categorically submitted that he's a genuine investor and fond of investing in small shares. 3.3. Based on the statements of the assessee and investigation report of the Kolkata Investigation Directorate, ld. Assessing Officer took an adverse view to hold that long term capital gain booked by the assessee is a prearranged method to evade taxes and launder money. For this, he observed that there is unusual rise in the price of the shares sold by the assessee for which assessee had failed to discharge his onus. Ld. Assessing Officer deliberated on the general modus operandi of such transaction as well as background of investigation carried out by the Investigation Directorate. He thus, completed the assessment by making an addition of Rs. 9,47,177/- u/s. 68, by holding that this amount has been introduced by the assessee out of these purported share sale receipts as his income being unexplained cash credit. 4. In the course of first appellate proceedings, assessee made detailed submissions along with documentary evidences. Ld. CIT(A) elaborately analyzed the facts and the evidences placed on record by the assessee dealt by him in para-7 of the first appellate order. The observations and findings of ld. CIT(A) are perused and found to be exhaustive and well founded. He has dealt with all the observations made by the ld. Assessing Officer. He has also taken note of facts from various documents placed on record. Further, he placed reliance on various judicial precedents, including that of Hon’ble Jurisdiction High Court of Bombay and thereafter objectively arrived at a conclusion that 7 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 action of ld. Assessing Officer in treating the long term capital gain on sale of shares of NCL Research as bogus cannot be sustained. He thus, deleted the addition, so made. On the legal issue raised by the assessee in respect of reopening of assessment, adjudication was not done since substantive grounds of addition were decided on merit in favour of the assessee. 4.1. Para-7 with its sub paragraphs from the order of ld. CIT(A) are extracted below for ready reference. “7.0 ANALYSIS OF THE FACTS AND ADJUDICATION OF THE GROUNDS: Accordingly, after considering the grounds of appeal, statement of facts and written submissions filed by the appellant, the appeal is adjudicated in the subsequent paragraphs of this order. 7.1 In Ground no. 2 and 3 the appellant has objected to the action of the Assessing Officer in not allowing the income shown from long term capital gain from sale of shares of NCL Research and Financial Services Limited claimed as exempt u/s 10(38) of the Act and making addition of Rs. 9,47,177/- u/s.68 of the Income Tax Act, 1961 of amount received on sale of above shares in assessment completed u/s 143(3) r.w.s. 147 of the Act. 7.2 From the facts of the case it is seen that during the FY 2010-11 the appellant has sold 10,000 shares of company NCL Research and Financial Services Limited for a consideration of Rs. 9,97,150/-. The appellant has shown the purchase of these 10,000 shares during the FY 2008-09 for a consideration of Rs. 22,500/-. By way of above transaction of sale of shares the appellant has derived income from long term capital gain of Rs. 9,47,177/- which was claimed as exempt as per provisions of section 10(38) of the Income Tax Act, 1961. The same amount was credited to capital account of the appellant. 7.3 The Kolkatta Investigation Directorate has undertaken investigation into 84 penny stock cases and found a modus operandi involving operators, intermediaries and the beneficiaries involved in racket of bogus long term capital gains. NCL Research and Financial Services Limited was as one of the 84 penny stock. During investigation by Kolkatta Directorate it was found that shares of penny stock companies are rigged and price of the shares are inflated/ increased by such rigging over a short period to book bogus long term capital gains. In all such penny stock companies it was found that the net worth or business of the penny stock company was not commensurate to the increase in share prices. 7.4 A list of beneficiaries who have transacted in the penny stock script of NCL Research and Financial Services Limited was forwarded in which the name of 8 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 the appellant was appearing. Based on the above information the case of the appellant was reopened by issuing notice u/s 148 of the Income Tax Act, 1961 and reassessment proceedings was undertaken 7.5 During the course of the assessment proceedings the appellant has submitted that he has purchased 10,000 shares of NCL Research and Financial Services Limited on 02.04.2008 for a consideration of Rs. 22,500/- for which the payment was made by cheque on 21.05.2008. The appellant has also submitted the copy of debit note with regard to the above transaction and certificate from the bank for making the payment of Rs. 22,500/- by cheque. The appellant has also furnished the copies of his Demat Account for the period 01/04/2008 to 31/03/2009 depicting the transfer of 10,000/- shares of NCL Research and Financial Services Limited on 26 June 2008 in the demat account. 7.6 In the assessment order passed the Assessing Officer has neither given any adverse findings with regard to the above claim of purchase of shares by the appellant nor doubted the authenticity of the said documents. It will be pertinent to produce Para 15 of the assessment order: “15. In his replies the assessee has mainly contended that since purchase was made through payment by RTGS and shares were allotted to him by the company, it was a genuine transaction. Secondly, sale was made online after paying STT at the prevalent market rates, therefore sale transactions were also genuine. The contention of the assessee was examined. It is not the case of this office whether purchase of shares through preferential placement did actually took place or shares were sold on the exchange at the prevalent market rates after paying STT or not. What this office has come to conclude on the basis of analysis, documentary evidences, circumstantial evidences, human conduct and preponderance of probabilities is that this entire edifice was only a colourable device used to evade tax.” 7.7 From the above it can be seen that the Assessing Officer has arrived at his conclusion about the long-term capital gain being bogus based on analysis, circumstantial evidences, financials of the company etc. and the finding in the investigation report. However, the claim made by the appellant for purchase of shares supported by documentary evidences in form of receipt, payment, credit in demat account was discarded by the Assessing Officer without conducting proper enquiry/ examination. The Assessing Officer was required to give proper reasoning why the documentary evidences produced regarding purchase of shares were not being considered as genuine. 7.8 From the Demat Account of the appellant 01/04/2008 to 31/03/2009 maintained with National Securities Depository Limited it is seen that during the FY 2008-09, the appellant has purchased and sold shares of other companies as well including purchase of shares of NCL Research and Financial Services Limited. The appellant is seen to have purchased shares of other companies such as Birla Cotsyn (India) Limited, Birla Machining & Tools Limited, Shree Digvijay Cement Co. Limited to name a few. Thus, the appellant has not done only a single transaction of purchase of 10,000 shares of NCL Research and Financial Services Limited during FY 2008-09. 9 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 7.9 From the facts of the appellant case it is seen that the appellant was doing the transaction of purchase and sale of shares and the purchase of shares of NCL Research and Financial Services Limited during FY 2008-09 was not a single transaction as alleged by the Assessing Officer in para 8.2 of the assessment order. It is also a fact that the increase in share prices of NCL Research and Financial Services Limited during FY 2010-11 is not based on the net worth of the company. Therefore, the fluctuation in share price of NCL Research and Financial Services Limited from FY 2008-09 to FY 2010-11 also depicts characteristics of being a penny stock. 7.10 However, from the details of sale made of shares it is seen that the appellant has not sold the entire 10,000 shares in one lot but it has been done over a period of time of 6 months after holding it for a period of nearly 2 years. The fact that the appellant has sold 4000 shares out of the 10,000 shares @ Rs. 37/- per share when earlier he has sold 2000 shares @ Rs. 180 per share also supports the claim of the appellant that it was a genuine transaction. If it would have been an arranged affair or obtaining of accommodation entry, the appellant would have sold the entire 6000 shares @ Rs. 180 per share. 7.11 Accordingly, the purchase and sale of shares of NCL Research and Financial Services Limited by the appellant cannot be treated as a bogus transaction without bringing on record evidence to show that the documents produced in support of the same are sham documents. In this regard, the observation of the Hon’ble ITAT Mumbai ‘F’ Bench dated 22.12.2023………. 7.12 The appellant has also relied on various judicial pronouncements in support of his claim. From the observations made by the various judicial forums it is clear that conclusion cannot be drawn solely based on the analysis of financial standing of a company and fluctuation of the share prices. It is equally important to bring on record material to establish that the documentary evidences produced with regard to the share transactions are sham or bogus and have been prepared only to obtain an accommodation entry. The appellant in this case has furnished the purchase invoice, payment for purchase made through banking channel and credit of shares of NCL Research and Financial Services Limited in Demat Account during the FY 2008-09 to demonstrate that the transaction was not bogus or sham. 7.13 In view of the discussion made above and respectfully following the judicial pronouncements on the subject including as enumerated above, the action of the Assessing Officer in treating the long-term capital gain derived by the appellant on sale of shares of NCL Research and Financial Services Limited as bogus LTCG cannot be sustained. Accordingly, the addition made by the Assessing Officer treating the amount of Rs. 9,47,177/- as unexplained cash credits u/s 68 of the Income Tax Act, 1961 in assessment order dated 31/12/2013 is directed to be deleted. 10 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 7.14 In Ground no. 1 the appellant has objected to the re-opening of assessment. Since the substantive grounds of addition made has been decided in favour of the appellant, this ground is not being adjudicated as being only of academic interest.” 5. Considering the facts on record, assessee being as a qualified professional as a Chartered Accountant who has clarified every aspect of the issue in the statement recorded in the course of assessment, reproduced in the improved assessment order itself and all the explanations and documentary evidences have been elaborately dealt by ld. CIT(A) in his order, as extracted above, we do not find any reason to interfere with the fact based, objective findings arrived at by ld. CIT(A) in deleting the addition made by ld. Assessing Officer. Accordingly, grounds raised by the revenue are dismissed. 5.1 To fortify the above findings, we find force of binding nature from the following decisions of Hon'ble High Court of Bombay being a Jurisdictional High Court. i) Pr. CIT v. Ziauddin A Siddique [Income-tax Appeal No. 2012 of 2017, dated 4-3-2022] held as under:- \"1. The following question of law is proposed: \"Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was justified in deleting the addition of Rs. 1,03,33,925/- made by AO u/s 68 of the I.T. Act, 1961, ignoring the fact that the shares were bought/acquired from off market sources and thereafter the same was DMATed and registered in stock exchange and increase in share price of Ramkrishna Fincap Ltd. is not supported by the financials and, therefore, the amount of LTCG of Rs. 1,03,33,925/- claimed by the assessee is nothing but unaccounted income which was rightly added u/s 68 of the I. T. Act, 1961?\" 2. We have considered the impugned order with the assistance of the learned Counsels and we have no reason to interfere. There is a finding of fact by the Tribunal that the transaction of purchase and sale of the shares of the alleged penny stock of shares of Ramkrishna Fincap Ltd. (\"RFL\") is done through stock exchange and through the registered Stock Brokers. The payments have been made through banking channels and even Security Transaction Tax (\"STT\") has also been paid. The Assessing Officer also has not criticized the documentation 11 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 involving the sale and purchase of shares. The Tribunal has also come to a finding that there is no allegation against assessee that it has participated in any price rigging in the market on the shares of RFL. 3. Therefore we find nothing perverse in the order of the Tribunal.” 4. Mr. Walve placed reliance on a judgment of the Apex Court in Principal Commissioner of Income-tax (Central)-1 v. NRA Iron & Steel (P.) Ltd. but that does not help the revenue in as much as the facts in that case were entirely different. 5. In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law. 6. The appeal is devoid of merits and it is dismissed with no order as to costs.\" ii) PCIT vs. Indravadan Jain HUF [2023] 156 taxmann.com 605 (Bom) wherein it was held: “Where shares were purchased by assessee on floor of stock exchange and not from broker, payment was made through banking channel, deliveries were taken in DMAT account where shares remained for more than one year, contract notes were issued and shares were also sold on stock exchange, there was no reason to add capital gains as unexplained cash credit under section 68” iii) CIT vs. Shyam R. Pawar [2015] 54 taxmann.com 108 (Bom) wherein it was held: “Where DMAT account and contract note showed details of share transaction, and Assessing Officer had not proved said transaction as bogus, capital gain earned on said transaction could not be treated as unaccounted income under section 68” 6. In the cross objection filed by the assessee, reopening of the assessment has been challenged. Since the substantive ground on the merit of the case for the addition made has been held in favor of the assessee, grounds raised by the assessee in his cross objection are not 12 Co No. 59/Mum/2025 & ITA No. 588/Mum/2025 Laxmilal Sethia, A.Y. 2011-12 adjudicated upon, as they are rendered mere academic. Accordingly, the cross objection filed by the assessee is dismissed as infructuous. 7. In the result, both, appeal of the Revenue and the cross objection filed by the assessee are dismissed. Order is pronounced in the open court on 27th May, 2025 Sd/- Sd/- (Pawan Singh) (Girish Agrawal) Judicial Member Accountant Member Dated: 27th May, 2025 MP, Sr.P.S. Copy to : 1 The Appellant 2 The Respondent 3 DR, ITAT, Mumbai 4 5 Guard File CIT BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "