An assessee is not a beneficiary of a bogus penny stock transaction if they can provide complete evidence to support the genuineness of the share transaction.

Issue

Whether the additions made under Section 68 of the Income-tax Act, 1961, based on the allegation of bogus long-term capital gains (LTCG) from the sale of penny stocks, can be sustained when the assessee has provided all necessary evidence, and the Assessing Officer has not brought any contrary evidence on record.

Brief Facts

An assessee company claimed an exemption for LTCG under Section 10(38) from the sale of shares of a company named ‘S’. The Assessing Officer (AO) received information from the Investigation Wing that ‘S’ was among the companies allegedly used for providing bogus accommodation entries for LTCG. The AO, therefore, treated the LTCG as a bogus transaction and made an addition under Section 68 of the Income-tax Act, 1961, alleging that the assessee was a beneficiary of a “penny stock scrip”. The assessee, however, submitted complete evidence, including contract notes, demat account details, and information regarding bonus shares.

Decision

The Tribunal deleted the additions made by the AO. The Tribunal held that the assessee had provided sufficient evidence to prove the genuineness of the share transaction. The Tribunal noted that the AO had not brought any adverse evidence to counter the documentary proof submitted by the assessee. The AO also did not allege that the broker involved in the transaction was part of any price manipulation or in providing bogus entries. The court, in turn, upheld the Tribunal’s decision, ruling that no substantial question of law arose from the Tribunal’s order.

Key Takeaways

Burden of Proof: While the initial onus is on the assessee to prove the genuineness of a transaction and the source of income, this case highlights that the burden of proof then shifts to the Assessing Officer to bring forth contradictory or adverse evidence to disprove the assessee’s claims.
Genuineness of Transaction: An allegation of a “bogus” or “accommodation entry” cannot be based merely on suspicion or information from an external source. The AO must conduct an independent investigation and produce evidence to establish that the transaction was not genuine.
Documentary Evidence: A transaction supported by proper documentary evidence like demat statements, contract notes, and bank records is generally considered genuine unless the revenue can prove otherwise.
No Substantial Question of Law: The court’s ruling reinforces the principle that when an order is based on a finding of fact supported by evidence on record, it does not raise a “substantial question of law” that would warrant further appeal.

HIGH COURT OF GUJARAT

Principal Commissioner of Income-tax 1

Sanjaykumar Damjibhai Gangani

BHARGAV D. KARIA and Pranav Trivedi, JJ.

R/TAX APPEAL NOS. 924 and 929 of 2024

SEPTEMBER 1, 2025

Karan G Sanghani for the Appellant.

ORDER

1. Heard learned Senior Standing Counsel Mr. Karan G. Sanghani for the appellant.

2. These tax appeals preferred under section 260A of the Income Tax Act, 1961 (For short “the Act”) arise out of common order dated 28.03.2024 passed by the Income Tax Appellate Tribunal, Surat Bench, Surat (For short “the Tribunal”) in Sanjaykumar Damjibhai Gangani v. Asstt. CIT (OSD) 606 (Surat – Trib.)/ITA No.15 & 16/SRT/2024 for Assessment Year 2015-2016. For the sake of convenience, substantial questions of law are taken from Tax Appeal No.929/2024 as under:

“i) Whether on the facts and in the circumstance of the case and in law, the Hon’ble ITAT was justified in deleting the addition of bogus long term capital gain claimed as exempted u/s 10(38) of the Act of Rs.46,96,881/- made by the Assessing Officer arising out of sale of shares of Sunrise Asian Ltd., a penny stock and without appreciating the findings of the Assessing Officer that the price movement of the company were not supported by financial fundamentals of the company?

(ii) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in allowing the appeal of the Assessee by holding that the investment in shares was genuine, simply placing reliance upon the decision of Hon’ble High Court in the case of CIT v. Himani M Vakil 425(Guj.) and overlooking the circumstantial evidences and preponderance of the probability in the case?

(iii) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in ignoring the fact that, one of the entry operators involved in this case Shri Anil Khemka has admitted that the scrip of Sunrise Asian Ltd has been used for providing accommodation entry?

(iv) Whether on the facts and circumstances of the case and in law the order of the Hon’ble ITAT suffers from perversity as it ignores the facts brought on record establishing manipulation of share prices of Sunrise Asian Ltd. as the upward movement of share price was not at all justified by the economic fundamental of company during the period 2011 to 2014?

(v) Whether on the facts and circumstances of the case and in law the Hon’ble ITAT erred in deleting the disallowance of commission of Rs. 2,34,844/- purportedly incurred by the Assessee towards payment to brokers who allegedly entered into the share transactions at the behest of the Assessee overlooking the fact that the entire transaction was stage managed with the object to facilitate the Assessee to plough back its unaccounted income in the form of fictitious Long Term Capital Gains of Rs.46,96,881/- and claim bogus exemption?

(vi) Whether on the facts and circumstances of the case and in law the Hon’ble ITAT erred in holding that addition made on account of unexplained commission in the order u/s 154 of the Act is made without show cause notice, however, before making such addition and passing rectification order the AO had issued show cause notice on 10.03.2021 to the assessee and no compliance of the same was made on the part of the assessee?

(vii) Whether on the facts and circumstances of the case and in law the order of the Hon’ble ITAT is not perverse in holding that addition made on account of unexplained commission in the order u/s 154 of the Act is made without show cause notice, whereas it is clear form the record that before making such addition through rectification order the AO had issued show cause to the assessee vide notice dated 10.03.2021?”

3. At the outset learned Senior Standing Counsel Mr. Karan Sanghani fairly submitted that questions proposed are based on identical facts as in Tax Appeal No.812 of 2023 in case of Pr. CIT v. Divyaben Prafulchandra Parmar 473 (Gujarat)) wherein vide order dated 02.01.2024, Tax Appeal is dismissed on similar proposed questions by the Revenue. It was further fairly submitted by learned Senior Standing Counsel Mr. Sanghani that there is no dispute as regard to similar and identical facts in case of respondent assessee as well as in case of Divyaben Prafulchandra Parmar (supra). Therefore, we rely upon the decision of this Court in case of Divyaben Prafulchandra Parmar (supra) wherein it is held as under:

“[10] The Tribunal, thereafter, has also considered the aspect of the receipt of sale consideration of the assessee as reflected in the bank statement and held as under:

“25. We note that assessee has received sale proceeds by electronic mode of payment system, that is, RTGS and NEFT, UTIB, directly in her SBI account, as follows:

Date	Mode	Amount (Rs)	Paper book
25.02.2014	RTGS	14,50,756.68	-49
05.03.2014	RTGS	32,27,539.63	-49
11.03.2014	NEFT	1,95,711.34	-49
	Total	48,74,007.65

With respect to BSE date produced by the assessing officer on page 2 and 3 of assessment order, it was submitted that the assessee has furnished copy of purchase bill. The payment of purchase of Rs.10,000 shares of Conart Traders Ltd., was made by cheque that can be seen from her SBI pass book. It is also appearing in her balance sheet as on 31.03.2012 and 31.03.2013. Assessment for assessment year (AY) 2013-14 was made by Assessing Officer u/s. 143(3) of the Act. The purchase of shares of Conart Traders Ltd, is accepted by the Assessing Officer. The said company was amalgamated with Sun Rise Asian Ltd. (in brief ‘SAL’) by virtue of order of Hon’ble Bombay High Court The assessee has produced numerous data details of “SAL” which was the basis of her decision so make the investment. All time high share price was Rs. 605.50 an on 31.03.2015 and from the month of Jan 2013 to July 2015. The price range stated by the Assessing Officer at pars 4 of his order is between Rs. 486 to 492 during the period February-2014 to June-2014. The assessee has sold shares of SAL at average rate of Rs. 487.40 during the month of February March 2014, which itself is an evidence of genuineness of transaction. Therefore, the allegations of rigging of manipulation of shares were refined by the assessee.

26. We note that Assessing Officer heavily relied upon the findings of Investigation Wing without carrying out any independent investigation of his own. Nothing was brought on record which would establish that the assessee was beneficiary of alleged accommodation entries provided by the so called Shri Anuj Agrawal. No corroborative evidences to support the finding of Assessing Officer were brought on record. No nexus was established. Further, no contrary and conclusive evidences furnished by the assessee. The enquiries were conducted by the DCIT at Kolkata and the statements were recorded at the back of the assessee. The assessee was deprived off to cross examine the witness. The documentary evidences submitted by the assessee were neither proved contrary nor proved fabricated. Assuming that the brokers may have done some manipulation but the assessee cannot be held liable for the act of the brokers when the entire transactions have been done through banking channel duly recorded in the Demat accounts with a Government depository and traded on the stock exchange. The sale transactions took place through recognized stock exchange and statutory Securities Transaction Tax (STT) as well as Service Tax was paid on sale transactions. In the online platform, the identity of the seller as well as purchaser would not be known. The shares were delivered in demat form through clearing mechanism of the stock exchange. Therefore, unless any link is established, the assessee could not be held to be part of the group indulging into rigging share prices of the scrip. The sale proceeds were realized through banking channel. i.e. RIOS NEET. There was as evidence of any cash exchange. The findings as well as conclusion of Assessing Officer were based on mere suspicion, and surmises as against settled proposition of law that suspicion howsoever strong could not partake the character of legal evidence. The entire case of Assessing Officer was based on mere presumption that the assessee ploughed back her own unaccounted money in the form of Bogus LTCG. The presumption needs to be corroborated by some evidence to establish the same. It is trite law that presumption, however, strong, cannot be a substitute, nor can it take place of evidence For the said proposition, reliance is placed on Hon’ble Supreme Court decision, in the case of Omar Salas Mohamed Sait reported in (1989) 37 ITR 151 (SC) where in it was held that no addition can be made in the basis of surmise, suspicion and conjectures.

27. We note that Assessing Officer has relied on the report of Investigation Wing Kolkata dated 24.04.2015. At the outset. these could not be relied on for the simple reason that the assessee has never takes any accommodation entry from any broker, she has supplied complete details of ‘SAL’ as well as the SEBI registered broker, Nirmal Bang Sec. Pvt. Ld., through whom she has done sale transaction of shares by paying STT The Assessing Officer has not made any inquiries with the share broker of the assessee. The Assessing Officer does not have any evidence to show that cash payment of Rs. 49,01,840/- made by the assessee to any broker or any entry provider. In absence of such evidence, genuine transactions recorded in on BSE as well as SBI hank account of the assessee cannot be held as accommodation entry. We note that the SEBI suspended only trading of 26 scrip out of the said 58 scrip and only 11 scrip prices were found rigged. The “Sunrise Asian Ltd” (Scrip Code 506615) was not included in these scrips whose shares assessee had purchased on 21.08.2011. We also note that in this case, the assessee, being an investor, has held shares for 2 and 1/2 years after holding shares for long period, the assessee sold the said shares. The assessee submitted Shares holding pattern of ‘SAL’ which is as under:

Category	No. of shares	%age
Promoters	8,447,558	18.50%
General Public	16,385,687	35.88%
Others	16,685,906	34.35%
Financial Institutions	5,143,909	11.26%

The ld. Counsel submits that the shares of “Sunrise Asian were being held buy Canara Bank, New Delhi, 6% of SAL. share during September 2015 and 11.26% shares of SAL. during March 2016 and June 2016 respectively. Thus, the sale transaction of ‘SAL’ shares cannot be doubted as bogus and denying the exemption u/s. 10(38) of the Act. The Id. Counsel also submitted the judgments of various Coordinate Benches of ITAT, wherein addition made by the assessing officer u/s. 68 in respect of sale of shares of “Sunrise Avian Ltd.” were deleted.”

[11] The Tribunal also distinguished the judgement relied upon on behalf of the Revenue in the case of Swati Bajaj (supra) in following paragraphs:

“33. We note that Ld DR for the Revenue heavily relied on the Judgement of Hon’ble Calcutta High Court in the case of Swati Bajaj and other (supra), however, we are of the view that as per the judgement of Hon’ble High Court of Bombay in the case of Thanna Electricity Supply Ltd (1994) 206 (ITR) 727 (Bom) wherein it was held that decision of a High Court will have the force of binding precedent only in the State or territories in which the Court has jurisdiction. Hence we note that judgment of Hon’ble Calcutta High Court in the case of Swati Bajaj and others (supra) should not be applicable to the assessee as it is outside territorial jurisdiction of Gujarat. However, the Judgment of Hon’ble Jurisdictional High Court of Gujarat in the case of Jagat Pravinbhai Sarabhai and Nishant Kantilal Patel (supra) should be applicable in the assesse’s case as there are the judgment of Jurisdictional High Court. Besides, the Jurisdictional Co-ordinate Bench of ITAT Ahmedabad in the save of M/s. Ice Worth Reality LLP. Vide ITA Nos. 565 & 566/Ahd/2020, for Assessment Year 2012-13 & 2015-16, order dates 13.03.2023 (supra), deleted the addition made by the Assessing Officer in respect of Sunrise Asian Ltd. (“SAL”) shares, which is impugned shared before us. We note that Assessing Officer has not been able to point out any evidence whatsoever to alleged that money changed hands between the assessee and the broker or any other person, or father that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged.

34. We note that addition under section 18 of the Act made merely on the basis of suspicion presumptions and probability of preponderance without any direct evidence to prove the transactions as non genuine or sham or demonstrating assessee’s involvement in any kind of manipulation, cannot be made. Thus, the sessee has explained and submitted evidences to prove identity, nature of source of the cash credit on account of sale proceeds credited received in the bank account of the assessee and also furnished all evidences comprising contract notes, broker, banking details in support of the genuineness of the transactions. The shares are sold by the assessee’s broker on BSE platform hence source in BSE’s clearing system. The transactions on the BSE platform and settlement system who are responsible for the transactions of the demat account and prevailing price on public domain prove the genuineness of the transactions. Therefore, respectfully, following the judgment of Hon’ble Jurisdictional High Court (supra) and Coordinate Bench of ITAT (supra), we deleted the addition Rs. 49,01,840/-.

35. Since we have deleted the mam addition of Rs 49,01,840/-, therefore Ground No 2 raised by the assessee for addition u/s. 69C for Rs. 98,038/-, w.r.t. notional commission expenses 2% of LTCG being unexplained expenditure, is consequential in nature and hence deleted.”

[12] As the Tribunal deleted the addition charging of income tax at the rate of 30% under Section 115BBE of the Act, was held to be not applicable.

[13] Feeling aggrieved by the order passed by the Tribunal, the appellant – Revenue has preferred this Tax Appeal on the proposed substantial questions of law narrated hereinabove.

[14] Learned Senior Standing Counsel Mr. Karan Sanghani for the appellant reiterated the submissions made before the Tribunal and submitted that the Assessing Officer, after analyzing the data made available from the Bombay Stock Exchange, came to the conclusion that the price of script, which the assessee sold, was fluctuating by 24 times and after sale of shares made by the assessee, the price has reduced to Rs.0.49. It was, therefore, submitted that the Assessing Officer, taking into consideration the volatility of the share price of the script sold by the asssessee, was justified in relying upon the report of the Investigation Wing of Kolkata as well as the fact that the SEBI has suspended the transaction of the said script for some time and accordingly, the Assessing Officer was justified in making addition of unaccounted income of the assessee on the ground of accommodation entries availed by the assessee.

[15] It was further submitted that the CIT(A), after considering the documents available on record, has upheld the view taken by the Assessing Officer. It was submitted that the Tribunal, after considering the submissions made by the assessee and the Departmental Representative, allowed the appeal. It was submitted that the Tribunal, therefore, contrary to the facts and evidence on record, has allowed the appeal without considering the findings of the Assessing Officer and the CIT(A) in its true perspective.

[16] Considering the contentions raised on behalf of the Revenue, the Tribunal has arrived at a finding of fact that shares of Sunrise Asian Ltd. sold by the assessee cannot be doubted as bogus and exemption under Section 10(38) of the Act was rightly availed by the assessee. The Tribunal has also concluded that the presumption drawn by the Assessing Officer was not corroborated by any evidence to establish the alleged non-genuine transaction by the assessee. It was, therefore, rightly held by the Tribunal that the claim of the assessee for exemption of Long Term Capital Gains under Section 10(38) of the Act cannot be held to be bogus on the basis of presumption in absence of any evidence brought on record by the assessee with regard to shares of Sunrise Asian Ltd, which is not even found to be rigged by the SEBI also. The Tribunal has also considered that the assessee held the shares for two and half years and after holding the shares for a long period, the same were sold by the assessee and therefore, reliance was placed on the decision of this Court in the case of Jagat Pravinbhai Sarabhai (supra), wherein this Court has held as under:

“5. The genuineness of investment in the shares by the assessee was substantiated by him by producing copy of transaction statement for the period from 1.6.2001 to 1.10.2010. The investment was made in the year 2000-01. The shares were retained for more than ten years and were sold after such long time. These circumstances suggested that the investment was not bogus or investment made in penny stock. The shares were purchased in order to invest and not for the purpose of earning exempted income by frequent trading in short span.

6. The finding recorded by the appellate authority and confirmed by the appellate tribunal is based on material before them. They are in the realm of findings of fact. No error could be noticed in the findings and conclusion that the investment was longstanding and genuine and was not penny stock on the basis of which the capital gain was wrongly claimed.

6.1 On the facts of case, no question of law much less substantial question of law arises.

7. Resultantly, appeal is dismissed.”

[17] In view of the above, we are of the opinion that no question of law much less any substantial question of law arises from the impugned order passed by the Tribunal. The appeal, being devoid of any merit, is, accordingly, dismissed.

4. Considering the above dictum of law in case of Divyaben Prafulchandra Parmar (supra) and applying the same to the facts of the case, we are of the opinion that no question of law much-less any substantial question of law arises from the impugned order of the Tribunal on the same reasoning as assigned by this Court in the said case.

5. Appeals are accordingly dismissed.