MEHUL HANSUKH SHAH ,MUMBAI V. ITO WARD 6(1)(1), MUMBAI

ITA 761/MUM/2025

AI Insights

The case revolves around the reassessment of Mehul Hasukh Shah's income for the assessment year 2016-17, where the Income Tax Officer (ITO) alleged that the assessee had generated bogus long-term capital gains (LTCG) from the sale of shares of Safal Securities Ltd. The ITO based his reassessment on information from the Investigation Wing, categorizing the shares as penny stocks involved in price manipulation. The assessee contested that he had not reported any LTCG and that the income from these shares was declared under 'business income'. The Commissioner of Income Tax (Appeals) upheld the ITO's decision, leading to the appeal before the Tribunal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 788536 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: misc
• Appeal Filed On: 03-02-2025
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRAVIN SALUNKHE; DR
• Assessee Lawyers: ANAND DESAI; AR
• Keywords: Business income; Reassessment proceedings; Capital Gains; Principle of natural justice; Penny stocks; Deduction for capital gain; FORM 26AS; Bogus
• Section: 147; 148; 271(1)(c); 68

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “H” BENCH, MUMBAI BEFORE SMT. BEENA PILLAI (JUDICIAL MEMBER) AND SHRI OMKARESHWAR CHIDARA (ACCOUNTANT MEMBER) I.T.A. No. 761/Mum/2025 Assessment Year: 2016-17 Mehul Hasukh Shah A/501, Yogi Avenue Yogi Nagar Eksar Road Borivali West Mumbai - 400091 PAN: AKMPS7735C Vs. ITO Ward – 6(1)(1), Mumbai (Appellant) (Respondent) Appellant by Shri Anand Desai, A/R Respondent by Shri Pravin Salunkhe, Sr.D/R Date of Hearing 29.10.2025 Date of Pronouncement 24.11.2025 ORDER Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of the order dated 06/12/2024 passed by NFAC, Delhi [hereinafter ‘Ld. CIT(A)’) for assessment year 2016-17 on the following grounds of appeal:- “• The Hon'ble CIT(A) erred in upholding the reassessment order passed under Section 147 r.w.s. 144 of the Act despite the fact that the assumption of jurisdiction under Section 147 of the Act was based on incorrect and erroneous information. • The Hon'ble CIT(A) failed to appreciate that the information received from the Investigation Wing regarding the alleged bogus Long Term Capital Gains (LTCG) was factually incorrect as the Appellant had never reported any Long-Term Capital Gains in his return of income, thereby rendering the entire reassessment proceedings void-ab-initio. Printed from counselvise.com 2 I.T.A. No. 761/Mum/2025 • The Hon'ble CIT(A) failed to appreciate that in the absence of any Long- Term Capital Gains in the Appellant's Return of Income, the allegation of bogus Long-Term Capital Gains is baseless, and the reassessment proceedings initiated under Section 147 are without jurisdiction. • The Hon'ble CIT(A) failed to consider that the Appellant had reported the earnings from trading in shares of Safal Securities Limited under the head Business Income' and duly offered the same to tax in his Return of Income. • The Hon'ble CIT(A) erred in confirming the addition made by the Assessing Officer without independently verifying the Appellant's Return of Income, which clearly shows that no Long-Term Capital Gains was reported by the Appellant. • The Hon'ble CIT(A) erred in upholding the addition made by the Assessing Officer solely on the basis of unverified and erroneous information without applying independent judgment and verifying the facts of the case. • The Hon'ble CIT(A) erred in confirming the reassessment order passed under Section 147 read with Section 144 without considering the Appellant's submission and documentary evidence, thereby violating the principles of natural justice. In view of above grounds, it is prayed by the Appellant that the order dated 6 December 2024 passed under section 250 of the Act by the Hon'ble CIT(A) for AY 2016-17 be quashed. • The Learned Assessing Officer erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the penalty proceedings should be dropped. The Appellant reserves the right to add, alter or amend to the above grounds of appeal.” Brief facts of the case are as under:- 2. The assessee filed his return of income on 31/03/2017 declaring total income at Rs. 4,90,760/-. The case was selected for scrutiny u/s 147 of the Act by issuing notice u/s 148 of the Act for following reason:- Printed from counselvise.com 3 I.T.A. No. 761/Mum/2025 • Assessee has sold 5000 equity shares of Safal Securities Ltd. whose equity shares have been used for generating bogus LTCG and contrived losses. 2.1. In response to the notice issued, the assessee filed its return of income on 26/10/2021 as originally filed. Subsequently, statutory notices were issued to the assessee. In response, the assessee filed the details of share brokers along with copy of profit and loss account of the shares. The assessee filed the relevant details of share transactions undertaken by it during assessment year 2016-17 and also filed Form 26AS in support. 2.1.1. The submissions made by the assessee before the Ld. AO was that he was having shares of Safal Securities Ltd. (in short “SSL”) and sold 5000 shares of SSL at Rs. 6.57/- aggregating to Rs. 32,888/- during financial year relevant to assessment year under consideration. The Ld. AO upon scrutinising the documents and evidence furnished by the assessee categorised the scrip of SSL as penny stock with weak fundamentals based on the report received from Investigation Wing. The Ld. AO noted that as per the report of Investigation Wing, the price of the scrip of SSL was manipulated to provide accommodation entry of bogus long term capital gain/long term capital loss to beneficiaries. 2.1.2. The Ld. AO thereafter reproduced the analysis by Investigation Wing in respect of SSL and came to the conclusion that net worth of the company was negligible and the share-price was artificially rigged by group of operators to accommodate beneficiaries for conversion of their unaccounted money into Printed from counselvise.com 4 I.T.A. No. 761/Mum/2025 accounted one under the guise of penny stock trading. The Ld. AO thus denied the long term capital gain exemption claimed by the assessee u/s 10(38) of the Act of Rs. 32,888/- and added the same u/s 68 r.w.s. 115BBE of the Act. Aggrieved by the order of the Ld. AO, the assessee preferred appeal before the Ld. CIT(A). 3. The Ld. CIT(A) without verifying the details furnished by the assessee upheld the observations of the Ld. AO and confirmed the additions so made. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal. 4. The Ld. AR submitted that the assesse had not earned any long term capital gain during the year under consideration. He submitted that the assessee in fact declared all the income from trading of securities under the head ‘income from business and professions’ and offered the same to tax. The Ld. AR submitted that provisions of Section 68 of the Act requires that assessee has to provide an explanation of any sum credited in its books of accounts and that the said explanation should satisfy the Ld. AO. He submitted that in the present facts of the case, the submission of the assessee is that he had not earned any long term capital gain from sale of shares of SSL and this fact has not been considered by the authorities below at all. The Ld. AR submitted that the period from when the assessee had been holding on to the shares of SSL has also been ignored. 4.1. He referred to page 111 of the paper book wherein the shares of this company was issued to the assessee on 01/10/1996. The Printed from counselvise.com 5 I.T.A. No. 761/Mum/2025 Ld. AR submitted that SSL was earlier known as Arrow Securities Ltd., at the time of purchase by the assessee. He submitted that subsequently, the shares were transferred in the name of the assessee and the transfer letter issued by the erstwhile Arrow Securities Ltd., with specific distinctive numbers are placed at pages 113 to 115 of the paper book. The Ld. AR submitted that during the time when the shares were purchased, the said company was not considered to be a penny stock and subsequently during 2014, the said company was identified to be one among the penny stocks. The Ld. AR referred to the profit and loss account placed at page 89 of the paperbook wherein the assessee treated the shares purchased to be stock-in-trade. He submitted that opening stock of SSL during the financial year relevant to assessment year under consideration was Rs. 20,000/- that was valued at Rs. 36,000/- at page 95 of the paper book and closing stock after sale of 5000 shares of the said scrip was quantified at Rs. 15,000/- for a value of Rs. 27,000/-. He submitted that at page 99, the summary of the shares held and sold during the year is placed which clearly indicates the sale of 5000 shares of SSL was through banking channel. 4.2. The Ld. AR submitted that, at the time of purchase, the assessee made payments through banking channels which is also evident from the bank statement furnished during the assessment proceedings. He submitted that demat account was not available during the relevant year of purchase as the same was made mandatory by the SEBI from 2009 onwards. He submitted that, merely because assessee could not furnish the demat statement of Printed from counselvise.com 6 I.T.A. No. 761/Mum/2025 the shares at the time of purchase, the transactions of the assessee cannot be treated to be not genuine. 4.3. The Ld. AR also raised various other arguments challenging the validity of the reopening of the assessment based on incorrect reasons recorded. He submitted that the reasons recorded by the Ld. AO was based on the premise that the assessee earned long term capital gain/long term capital loss. On the contrary, the Ld. AR submitted that the assessee in its computation of income, never claimed any exemption u/s 10(38) of the Act and, therefore, the question of claiming any benefit under long-term capital gain/long term capital loss does not arise. 4.4. On the contrary, the Ld. DR harped on one argument that the purchases have not been established by the assessee with the help of Demat statements and, therefore, the transaction is doubtful. He also placed reliance on the observations and the order passed by the authorities below. We have perused the submissions advanced by both the sides in light of the records placed before us. 5. It is noted that, the assessee was issued a letter transferring the shares in his name on 01/10/1996 of 10,000 shares of Arrow Securities Ltd., which was subsequently renamed as Safal Securities Ltd. (SSL). It is also noted that post 1996, the assessee has not purchased any shares of the said company. From the statement of profit and loss account filed by the assessee, it is further noted that, the assessee is a regular trader and invested in various other securities all of which have been held as stock in the Printed from counselvise.com 7 I.T.A. No. 761/Mum/2025 balance-sheet. Demat statement as on the date of sale of SSL is placed on record showing the sale of 5000 shares on 18/11/2015 for a price of Rs.32,887.31/-. 5.1. It is an admitted fact that, during the years when the shares were purchased by the assessee there was no requirement for de- matting the same. Under such circumstances, letter showing transfer of shares, serves as an initial proof of the entitlement of shares and has to be treated as a valid document in the hands of the assessee. The letter of transfer of shares records the intent of the company to transfer the ownership of the said quantity of shares purchased by the assessee. Unless this document is considered or proved to be fabricated by the revenue, the same cannot be rejected at the threshold. In the present facts of the case, the total number of shares held by the assessee of SSL (erstwhile Arrow Securities Ltd.) reflects in the statement of accounts filed by the assessee as stock in trade. Upon sale of 5000 shares the balance 15000 shares still remain as stock in trade in the statement of accounts filed by the assessee. 5.2. We further note that, the assessment order does not reveal any evidence that could lead to the conclusion that the assessee was involved directly in rigging of the share prices of SSL. There is no item of evidence against assessee’s broker and that could lead to a conclusion that the assessee was aware of the prices being rigged. Even otherwise, assessee has declared the sale proceeds as business receipts and no benefit under long-term capital gain/long term capital loss has been claimed during the year under Printed from counselvise.com 8 I.T.A. No. 761/Mum/2025 consideration. This itself leads to the conclusion that the reopening of the assessment was though on primary suspicion, the assessment completed was without proper application of mind to the peculiar facts that existed in the present case. 5.3. We further note that the Ld. AO relied on the statement of third parties and did not conduct any independent investigation. The revenue could not make out a case that there is unaccounted money transaction by the assessee. The fact remains that the assessee furnished relevant evidence to prove the purchase and sale of the shares. Another relevant point that cannot be ignored is that the assessee held the shares since 1996, which further establishes the bonafide intention of the assessee. We, therefore, are unable to concur with the observations of the authorities below which do not stand the test of law. Based on the above discussions, we direct the Ld. AO to delete the addition made in the hands of the assessee. Accordingly, the grounds raised by the assessee stand allowed. 6. In the result, appeal of the assessee stands allowed. Order pronounced in the open court on 24/11/2025 Sd/- Sd/- (OMKARESHWAR CHIDARA) (BEENA PILLAI) Accountant Member Judicial Member Mumbai Dated: 24/11/2025 SC Sr. P.S. Printed from counselvise.com 9 I.T.A. No. 761/Mum/2025 Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order (Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "