VINOD HIRACHAND SANGHVI,MUMBAI V. ACIT, CIRCLE-19(3), LALBAUG, MUMBAI

ITA 4340/MUM/2023

AI Insights

The case revolves around the reassessment of the income tax return of Vinod Hirachand Sanghvi for the assessment year 2013-14, where the Income Tax Department challenged the legitimacy of the long-term capital gains claimed by the assessee on the sale of shares of Shreenath Commercial and Finance Limited. The reassessment was initiated based on information from the Investigation Wing, which alleged that the shares were part of a penny stock scheme used to generate bogus capital gains. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) upheld the additions made under sections 10(38) and 68 of the Act, treating the gains as unexplained. However, the Tribunal, after examining the evidence and the arguments presented, concluded that the additions were unjustified and allowed the appeal of the assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 397069 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2013-2014
• Other Referred Cases: PCIT vs Kuntala Mohapatra, PCIT vs Krishna Devi, PCIT vs Indravadan Jain, HUF, PCIT vs Ziauddin A Siddique, ITO vs Smt. Kuntala Mohapatra, Smt. Veena Chaturvedi vs DCIT, CIT vs Mr. Shyam R. Pawar
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH MESHRAM
• Assessee Lawyers: RAJ KUMAR SINGH ITP
• Keywords: Unexplained cash credit; Unexplained expenditure; Principle of natural justice; Accommodation entries; Source of fund; Assessment record; Validity of assessment; Opportunity of cross examination; Bogus
• Section: 148; 143(3); 68; 133(6); 69C

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER & GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 4340/MUM/2023 (AY : 2013-14) (Physical hearing) Vinod HirachandSanghvi 315, Gr. Floor, Gogari Mansion, 1 Carpenter Street, Charni Road, Mumbai-400004. [PAN No. AFMPS3101F Vs ACIT, Circle-19(3), Mumbai Piramal Chamber, Lalbaug, Parel, Mumbai, Maharashtra-400012. Appellant / Assessee Respondent / Revenue Assessee by Shri Raj Kumar Singh (ITP)/AR Revenue by Shri Rajesh Meshram, Sr. DR Date of institution of appeal 30.11.2023 Date of hearing 25.03.2025 Date of pronouncement 27.05.2025 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the assessment order of ld. CIT(A) dated 29.09.2023 for A.Y. 2013-14. The assessee has raised the following grounds of appeal: “1. That on facts of the case and in law notice issued u/s 148 dated 15/09/2016 to initiate the reassessment proceeding and consequent assessment order passed u/s 143(3) r.ws 147 of the 1.T. Act, 1961 on 28/12/2017 are without jurisdiction and bad in law. 2. That on facts of the case and in law the Id. A.O. and Id. CIT (Appeals) both have erred in denying the legitimate exemption claim of section 10(38) and in making and confirming the addition u/s 68 at Rs.27,90,000/- treating the sale proceeds of listed long-term equity shares subjected to collection of STT, sold on recognized stock exchange at the prevailing quoted rate after holding for more than one year as unexplained cash credit disregarding the supporting documentary evidences furnished merely on the basis or untested report of D.I. Kolkata but without bringing any adverse evidence or material on assessment record. ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 2 3. That the alleged denial of exemption claim of section 10(38) and alleged addition made u/s 68 at Rs. 27,90,000/- is wrong on facts and bad in law since the copy of information and documents received from Investigation Directorate, Kolkata have been relied upon by the Id. A.O. without verification and adjudication thereof and assessee appellant has not been provided with such material thus denying the opportunity of cross examination and or rebuttal of the same in gross violation of principal of natural justice. 4. That the Id. A.O. and also Id. Appellate Commissioner both have erred on facts and in law in making and confirming the disallowance u/s 69C at Rs.55,800/-by estimating 2 percent commission payment to alleged entry providers on sale proceeds of LTCG shares of Rs.27,90,000/- only on assumption and without backing of any shred of any adverse evidence of such payment by the appellant. In view of the same alleged disallowance made u/s 69C being wrong on facts and bad in law thereof same may be deleted. 5. That all the appeal grounds raised are independent grounds and without prejudice to each other. 6. That the appellant craves the leave to amend, alter, substitute and or to raise new or additional grounds of appeal at the time of hearing.” 2. Brief facts of the case are that assessee is an individual, filed his return of income for A.Y. 2013-14 on 27.09.2013 declaring income of Rs. 9,28,160/-. Initially, the case was processed under section 143(1). Subsequently, case was reopened u/s 147. Notice under section 148 dated 15.09.2016 was served upon the assessee. In response to notice under section 148, the assessee filed his reply on 04.10.2016 stating that return filed u/s 139(1) on 27.09.2013 may be treated as return filed in response to notice under section 148. The reasons recorded were supplied to the assessee. The assessing officer after serving notice under section 143(2) on 25.09.2017 proceeded for reassessment. During reassessment, the assessing officer recorded that in the computation of income, the assessee has shown income from business, house property, capital gain and from other sources. In the working of ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 3 capital gain, the assessee has shown long term capital gain of Rs. 27,90,000/- and sale of scrip of Shreenath Commercial and Finance Limited. The assessing officer in para 5 of assessment order recorded that he was having ITD data, BSE data, money control website, taxman, court rulings, internet and report of Investigation Wing. By referring report of Investigation Wing in para 6 of assessment order noted that as per report of Investigation Wing, Kolkata Shreenath Commercial and Finance Limited was one of penny scrip. Share of such company was acquired by beneficiaries for claiming long term capital gain, at very low prices through route of preferential allotment and off market transaction. The assessing officer by referring the financial of Shreenath Commercial and Finance Limited at page no. 7 and 8 of the assessment order recorded that net worth of company was negligible. The despite negligible net worth and business activity, shares were artificially rigged by group of operators for providing accommodation entries of long term capital gain or losses. Anil Agarwal of Mumbai was one of the person who were involved in rigging the prices. In para 6 of assessment order, the assessing officer recorded that notice under section 133(6) were issued to the purchaser of share for calling the details of sale of purchase with the assessee with their D-mat account, period of holding and source of funds. All such notices were returned back with the remark “left or unserved”. As per Bombay Stock Exchange (BSE) data, the prices of scrips fall sharply to Rs. 0.73 per share. On the basis of such adverse observation, the assessing officer issued show cause notice to the assessee as to why long term capital gain claimed by assessee should not be treated as unexplained credit under ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 4 section 68. Further accommodation charges @ 2% should not be added under section 69C. The assessing officer in para 9.5 of assessment order recorded that assessee filed his reply in TAPAL. It was stated in the reply that report of Investigation Wing is not acceptable. The assessee furnished list of other traders who have also traded in the stock market and earned more margin and relied on certain case law. The reply of assessee was not accepted by assessing officer. The assessing officer in para-10 of assessment order recorded that assessee purchased 10001 share of Shreenath Commercial and Finance Limited to BSE. The assessee sold such share and received a sum of Rs. 27,90,000/-.The sale of share of off market, so contract notes were available. There is a big rise in the price of shares within a short span of time. The rise in share was not any commercial principles and market factors. There is report of Investigation Wing that Investigation Wing in Mumbai and Kolkata that Anil Agarwal and associated brokers made an arrangement in which the shares were acquired by the assessee, the share prices were rigged and then will be held of operators by routing the cash, shares were sold at high price to earn tax free capital gain. The assessee failed to discharge his onus. The assessee has not furnished any evidence. SEBI has passed an order wherein the main operator, Anil Agarwal and Comfort Fincorp are said to be indulging into a share manipulation. The transaction carried out by assessee in series of preconceived steps, the performance of each of which is depending on others being carried out. The true nature of such share transactions lacked commercial contents being artificially structured transactions entered into with the sole intention to ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 5 evade tax. The assessing officer by referring various case laws treated the long term capital gain as unexplained and added under section 68. The assessing officer also added 2.00% of capital gain as unexplained expenditure. Thereby made further addition of Rs. 55,800/- in assessment order dated 28.12.2017 passed under section 143 read with section 157. 3. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee filed detail statement of fact. The statement of facts are recorded by ld. CIT(A) on page no. 2 to 3 of impugned order. In the statement of fact, the assessee stated that he is in the business of ferrous and non-ferrous metal. He is also regularly making transaction in share as investment activities. The assessee has shown long term capital gain of Rs. 52,43,071/- on sale of various scrips including long term capital gain on sale of listed equity shares of Shreenath Commercial and Finance Limited through recognised stock exchange and paid Security Transaction Tax (STT). The long term capital gain was initially accepted under section 143(1). Merely on the basis of information of DIT, Kolkata case of assessee was reopened. The assessing officer has not made his investigation. All the evidences in respect of sale and purchase of exempt long term capital gain, was provided to the assessing officer during reassessment proceeding. Shares were sold through registered brokers with SEBI at prevailing quoted trade rate which was subjected to security transaction tax. Shares were sold after one year. The assessee purchases as well as sold share of Shreenath Commercial and Finance Limited through registered broker who have collected STT as reflected in purchase and share ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 6 notes including trade number, trade time, quantity, sale rate broker, service charge and STT. The entire amount has been received through banking channel. Copy of purchase and sale notes d-mat statements were furnished. The assessing officer disregarded the evidence and explanation furnished by the assessee. The assessing officer made addition merely on the basis of information from Investigation Wing without providing copy of such information, statement and evidence and the material relied for making addition. The additions were made in gross violation of natural justice and without bringing any adverse evidence on record. The assessee is not provided opportunity for cross-examination of persons, whose statement was used against the assessee. The name of assessee has not been mentioned specifically by any of them, whose statement was recorded, as beneficiary of their transaction. Merely gathering some material behind the assessee is not sufficient to disprove the comprehensive evidence filed by assessee. The assessing officer made addition simply on the basis of assumption and estimated addition @ 2.00% of the sale proceeds of shares. The assessee on the reopening also stated that reopening is without jurisdiction and bad in law. The assessee further stated that he has made transaction through recognised stock exchange and furnished supporting documentary evidence. 4. The ld. CIT(A) after referring the contents of statement of fact pleaded by assessee, finding of the assessing officer confirm the action of assessing in para 7 at page no. 15 to 17 of his order. The ld. CIT(A) while confirming the action of assessing held that assessing officer disallowed the claim u/s 10(38) on the basis of data obtained from various sources which was thoroughly ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 7 verified and analysis were done as per share market fundamental, wherein it was found that assessee has sold shares of penny stock company of Rs. 27,90,000/- which was claimed as exempt long term capital gain. It was pre- arranged method adopted by assessee in connivance with entry operator. It was further held that in September 2011, the market price of share was at Rs. 140 which was jacked upto Rs. 800/- in January, 2013 within 15 months. The price was came down in January 2016 in the range of Rs. 22 to Rs.10/-. The methodology was used for the beneficiary who wanted to avoid loss or for taking long term capital gain. The loss taking beneficiary paid cheque to long term capital gain and the cash provided by long term capital gain beneficiary is return to the loss taking beneficiary. The operator deducts his commission before payment by cash. The ld. CIT(A) also noted that DGIT, Kolkata provided list of beneficiary along with the statement wherein the scrip of Shreenath Commercial and Finance Limited is appearing in the list of penny stock which is used for generating bogus capital gain. The name of Shreenath Commercial and Finance Limited was changed to Proaim Enterprises Ltd. The entire sale and purchase is a managed affair. Contract note, proof of purchase and share through SEBI, copy of bank statement evidencing receipt of cash on sale of share, entry in the pass book about proof of STT is not provided during appellate proceeding. On the basis of aforesaid observation, the ld. CIT(A) upheld the action of assessing officer. Once the disallowance of claim under section 10(38) was upheld, the addition of unexplained expenditure added @ 2.00% of sale consideration ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 8 was also upheld. Further, aggrieved the assessee has filed present appeal before Tribunal. 5. We have heard the submission of learned authorised representative (ld. AR) of the assessee and the learned senior departmental representative (ld. Sr. DR) for the Revenue. Ground no. 1 of appeal relates to issuance of notice under section 148 and validity of assessment order passed under section 143(3) r.w.s. 147. During the hearing, no specific submission on ground no. 1 of the appeal was made, therefore, this ground of appeal is treated as not pressed and subsequently, dismissed. Ground no. 2 relates to disallowance of long term capital gain and treating the same as unexplained cash credit. The ld. AR of the assessee submits that assessee purchased 50000 shares of Shreenath Commercial and Finance Limited on 09.03.2011 @ Rs. 21.27 per share. The face value of share were Rs. 10/-. The assessee was allotted bonus share in ratio of 1:1 on 17.03.2011. Thus, the assessee held Rs. 1,00,000/- share. The assessee sold all shares on 05.09.2012 @ Rs. 27.75 per shares for a total consideration of Rs. 27,74,913/-. Purchase and sale of share were conducted through recognised stock exchange. The assessee was a bona fide purchaser. The average cost of share after bonus share was Rs. 10.74 per share. The shares were sold @ 27.75 per share. The assessee is a regular investor and invested in a number of shares, all such details provided on page no. 65 to 69 of paper book. The assessee availed the service of HDFC Bank depository services. During the assessment complete details of shares were provided to the assessing officer, which consists of contract note of SEBI. Extract from the money control in support of bonus shares, ledger ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 9 account of assessee’s broker, D-mat account with HDFC Bank, bank statement with HDFC Bank highlighting the transaction of shares, D-mat statement showing the holding of several listed equity shares as on 31.03.2013. Computation of total income, complete set of audited annual accounts with all shareholders and Note of account of business propriety firm Radiant Steel. The assessing officer disregarded all such evidences and held that no details were furnished. The assessing officer has not provided any evidence on the basis of which the assessing officer made addition. Before ld. CIT(A), the assessee again furnished all such evidences. The ld. CIT(A) also disregarded such evidences. All the evidences filed by assessee proved beyond doubt that assessee is a regular investor dealing in share and securities from last many years and having substantial investment of gross in shares. The brokers have information of bonus share was likely to be issued. Purchase as well as share was made online through recognised stock exchange. The assessee paid STT on purchase as well as on sale. There is no allegation against the stock broker of assessee about price rigging or manipulation by any law enforcement. The broker of assessee never indulged in such activities. There was no enquiry from the broker. No defect in the documents furnished by assessee was pointed out by lower authorities. Holding period is more about 18 months. The assessee has not earned abnormal profit that is assessee made investment of 10.63 lacs and sold at net amount of Rs. 27.74 lacs. Thus earned about 17.11 lacs which can never be abnormal figure. To support his submission, the ld. AR of the assessee relied on the following decision. ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 10  PCIT vs Kuntala Mohapatra (2024) 160 taxmann.com 608 (SC).,  PCIT vs Kuntala Mohapatra, ITA No. 23 of 2022. ( Orissa HC),  ITO vs Smt. Kuntala Mohapatra (ITA No. 50/CTK/2020),  PCIT vs Smt. Krishna Devi (Delhi High Court dated 15.01.2021),  PCIT vs Indravadan Jain, HUF (Bombay HC in ITA No. 454 of 2018),  PCIT vs ZiauddinA Siddique (Bombay HC in ITA No. 2012 of 2017),  ITO, vs Smt. Mamta Rajivkumar Agarwal, in ITA No. 1788/AHD/2019)  Smt. Veena Chaturvedi vs DCIT in ITA No. 1702/Mum/2021),  CIT vs Mr. Shyam R. Pawar (Bombay HC in ITA No. 1568 to 1571 of 2012).” 6. On the other hand, ld. Sr. DR for the Revenue supported the order of lower authorities. The ld. SR DR submits that assessing officer as well as ld. CIT(A) discussed the issue in length which he fully supports. The ld. SR DR for the Revenue also relied on the decision of Kolkata High Court in Swati Bajaj (2022) 446 ITR 56 (Kol) 288 taxmann 403 (Kol). 7. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that the assessee in his has shown long term capital gain on sale of certain scrips. The assessee has shown total long term capital gain f Rs.52,43,071/-. The assessee has purchased share of Shreenath Commercial and Finance Limited on 09.03.2011 @ Rs. 21.27 per share. The face value of share were Rs. 10/-. The assessee was allotted bonus share in ratio of 1:1 on 17.03.2011. Thus, the assessee held Rs. 1,00,000/- share. The assessee sold all shares on 05.09.2012 @ Rs. 27.75 per shares for a total consideration of Rs. 27,74,913/-. Purchase as well as sale of shares was conducted through recognised stock exchange. The assessee was a bona fide purchaser. The average cost of share after bonus share was Rs. 10.74 per share. The shares were sold @ 27.75 per share. The assessee is a regular investor and invested ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 11 in a number of shares, all such details provided on page no. 65 to 69 of paper book. The assessee availed the service of HDFC Bank depository services. Total investment of assessee in various scrips as on 31.03.2011 was of Rs.7.38 Crore. The investment in the impugned shares was only of Rs. 10,63,526/- 0nly. The assessee has earned Rs. 17,11,387/- only. The assessing officer added entire sale consideration of scrips of Shreenath Commercial and Finance Limited as unexplained taxable income. 8. We find that the Assessing Officer doubted the transaction of assessee on the basis of report of Investigation Wing Mumbai. The AO made addition of sale consideration of scrips of Shreenath Commercial and Finance Limited as unexplained taxable income under section 68. The AO also added 2.00% of sale transaction by taking view that the paid commissions to the entry provider. The AO made addition on unexplained commission of Rs. 55,800/- under section 69C of Income Tax Act. We find that before ld CIT(A), the assessee has furnished complete evidence including contract note of shares, Dmat account details, detail of bank account. However, no adverse evidence was brought against such evidence, nor the assessing officer made adverse comment on such evidences. The AO or ld CIT(A) has not made any independent investigation of facts to connect the assessee or his broker with the transaction of alleged price rigging. So far as allegation of price rigging is concerned, no role or the activities of the brokers of assessee in price manipulation is brought on record. We find that there is no allegation or adverse finding or report of SEBI about price manipulation by the broker of assessee. No independent investigation of facts was carried out by the lower ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 12 authorities, if any transaction of assessee even remotely connected with the entry provider. The assessee claimed that he made investment in shares of Shreenath Commercial and Finance Limited as a regular investor. At the relevant time the shares of Shreenath Commercial and Finance Limited was traded in BSE. The assessee paid transaction tax on the sales of such shares. Moreover, the assessee was a regular investor in various scrips as has been seen from his portfolio with his broker, the assessee has made investment in 68 scrips. It is not the case of AO that the assessee indulged only in the scrips of Shreenath Commercial and Finance Limited only. 9. We find that Hon'ble Gujarat High Court in the case of Himani M. Vakil (2014) 41 taxmann.com 425 (Guj) held that where assessee duly proved genuineness of sale transaction by bringing on record contract notes of sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, Assessing Officer was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit. Gujarat High Court in the case of Parasben Kasturchand Kocher(2021) 130 taxmann.com 176 (Guj), also held that when assessee discharged his onus by establishing that transactions were fair and transparent and all relevant details with regard to transfer furnished to Income Tax Authority and the Tribunal have also took the notice of fact that the shares remained in the account of assessee, the assessee also furnished demat account and details of bank transaction about the sale and purchase of shares, the addition was deleted. Further, we find of Hon'ble Jurisdictional High Court in the case of PCIT Vs. Indravadan Jain, HUF in Income Tax Appeal No.454 of 2018 dated ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 13 12.07.2023 also held that when Assessing Officer nowhere alleged that transactions made by assessee with a particular broker or share broker was bogus, merely because investigation was done by SEBI against the broker or its activities, the assessee cannot be said to have entered into ingenuine transaction. In a recent decision in PCIT Vs Mamta Rajiv Kumar Agarwal (2023) 155 taxmann.com 549 (Gujarat) also held that where the assessee had sold the shares and earned LTCG and the Assessing Officer alleged that transaction was penny stock deal aim at illegitimately claiming LTCG exemption under section 10(38), since there was no allegation on record suggesting the assessee or his broker involved in rigging up the price of scrips, the addition was rightly deleted by Tribunal. 10. We find that assessee made sale of shares through BSE and paid security transaction tax and there is no allegation against the share broker through whom assessee has made sales that they were indulging any price manipulation. Therefore, we do not find any justification in treating the LTCG as unexplained cash credit in absence of any cogent evidence against the assessee specific. 11. The ld Sr DR for the revenue while making his submissions strongly relied on the decisions of Kolkata High Court in Swati Bajaj (supra), which is non- jurisdictional High Court, though there are contrary decisions of Jurisdictional High Court as referred above, favouring assessee. Hon’ble Apex Court in Union of India Kamalakshi Finance Corporation Ltd (1991) (55) ELT 443-SC held that decision of jurisdictional High Court would have higher precedence value on the Tribunal than the decision of non-jurisdictional High Court. In ITA No. 4340/Mum/2023 Vinod Hirachand Sanghvi 14 the result, the addition of undisclosed income under section 68 is deleted. Considering the fact that we have accepted the LTCG by deleting the addition made under section 68, therefore the addition of alleged commission payment is also deleted. In the result, the grounds of appeal raised by the assessee on merit of additions are allowed. Further, considering the facts that we have allowed appeal on merit, therefore, adjudication on grounds of appeal relates with the validity of reopening have become academic. 12. In the result, the appeal of assessee is allowed. Order pronounced in the open Court on 27/05/2025. Sd/- GIRISH AGRAWAL ACCOUNTANT MEMBER - Sd/- PAWAN SINGH JUDICIAL MEMBER MUMBAI, Dated: 27/05/2025 Biswajit Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai "