No Movement of Shares in DEMAT Means No Transfer or Cash

No Movement of Shares in DEMAT Means No Transfer or Cash Addition; Write-Off Is Not Unexplained Expenditure

Issue

Whether an addition under Section 68 can be sustained as unexplained cash credit on a notional share transaction where no actual transfer of shares occurred in the DEMAT account, and whether the validity of such transaction warrants remanding to the CIT(A).
Whether writing off a debtor’s balance in the books of account constitutes “unexplained expenditure” under Section 69C.

Facts

Notional Share Sale & Loan Adjustment: For AY 2017–18, the assessee claimed to have sold 7,80,910 shares of a listed company offline at ₹80 per share (totaling ₹6,24,72,800) to adjust against an outstanding loan liability.
Capital Loss Incurred: The transaction resulted in a Long-Term Capital Loss (LTCL) of ₹4,68,54,600, which was not claimed for set-off or carry forward in the belated return filed under Section 139(4).
Absence of Share & Money Movement: The Assessing Officer (AO) noted that the DEMAT closing balance and shareholding pattern remained unchanged. No contract notes, broker confirmations, trade data, or bank trails were produced.
Addition Under Section 68: Treating the transaction as non-genuine, the AO added the credited sale consideration of ₹6.24 crores under Section 68 as an unexplained cash credit.
Debtor Write-Off: The assessee wrote off a debit balance of ₹6,50,000 standing in the name of a debtor. The AO treated this write-off as an unexplained outgo under Section 69C.
Appellate Proceedings: The CIT(A) held the share transaction genuine, deleted the Section 68 addition, and also deleted the Section 69C addition after verifying that expenses had already been disallowed.

Decision

No Share Transfer Under Section 2(47): Since there was no actual movement of shares from the DEMAT account, no legal “transfer” occurred within the meaning of Section 2(47). Consequently, no real income or loss arose to attract addition or tax liability.
No Notional Addition Permitted: The AO could not make an adverse addition merely because the assessee attempted to notionally reflect a reduction in loan liability without any real cash flow or transfer.
Remand to CIT(A): The issue regarding the share transaction was remitted back to the CIT(A) to set out in clear speaking terms the basis and requirements on which the transaction was concluded to be genuine.
Section 69C Inapplicable to Write-Offs: Writing off a debtor’s debit balance does not constitute incurring an “expenditure” under Section 69C. The deletion of the ₹6,50,000 addition was upheld in favor of the assessee.

Key Takeaways

DEMAT Movement Essential for Share Transfer: In the absence of an actual debit/credit shift in DEMAT statements, broker documentation, or banking trails, a transaction does not constitute a “transfer” under Section 2(47) for capital gains or cash credit additions.
Writing Off Debts Is Not Expenditure: Section 69C applies exclusively to unrecorded or unexplained monetary outgo/expenditure; a mere accounting write-off of a debit balance cannot be taxed as unexplained expenditure.

IN THE ITAT MUMBAI BENCH ‘A’

Income-tax Officer

Adhir Barter (P.) Ltd.

Pawan Singh, Judicial Member
and Girish Agrawal, Accountant Member

IT Appeal No. 2984 (MUM.) of 2025
[Assessment year 2017-18]

JULY 23, 2026

Surendra Mohan, Sr. DR for the Appellant. Viraj Mehta, CA for the Respondent.

ORDER

Girish Agrawal, Accountant Member.- This appeal filed by the Revenue is against the order of CIT(A)/National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2024-25/1072888957(1), dated 04.02.2025, passed against the assessment order by Income Tax Officer, Ward-9(1)(1), Mumbai, u/s. 143(3) of the Income-tax Act (hereinafter referred to as the “Act”), dated 30.12.2019, for Assessment Year 2017-18.

2. Grounds taken by the Revenue are reproduced as under:

“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition made u/s 68 toward sale of equity share of Rs. 6,24,72,800/- which remained unexplained.

” 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition u/s. 69C of Rs. 6,50,000/ – being unexplained expenditure.”

3. Brief facts of the case are that assessee filed its return of income belatedly u/s. 139(4) on 16.03.2018, reporting total income at a loss of Rs.4,68,54,600/- which was subsequently revised, reporting total income at Nil. In the course of assessment proceedings, from the verification of statement of long term capital loss (LTCL) and Note-6 relating to ‘Non-current Investments’ forming part of the ‘Notes to the financial statements for the ended on 31.03.2017’, ld. Assessing Officer noted that assessee has sold 7,80,900 shares of Shree Ram Urban Infrastructure Ltd. (SRUIL) at a price of Rs.80/- per share. Ld. Assessing Officer further, observed from the submission made by the assessee wherein it was stated that there was no bank account operational during the year under consideration. He initiated enquiry by issuing notices u/s. 133(6) to banking institutions and DMAT depositories, based on details given by the assessee in its submissions. Ld. Assessing Officer, further observed that assessee had reported balance number of shares of SRUIL as on 01.04.2016 at 22,15,322 and balance number of the same shares as on 31.03.2017 at 14,34,412. Contrary to this, he noted that in the DMAT statement obtained by him from Stock Holding Corporation of India Ltd. (SHCIL) i.e., the DMAT depository, mentioned the balance number as on 31.03.2017 at 22,15,322 instead of 14,34,412, reported by the assessee. Further, he noted from the audited balance sheet of SRUIL available in the public domain that the balance of shareholding for Assessment Year 2016-17 and 2017-18 and at the end of second quarter of Assessment Year 201819 remained unchanged at 22,15,322.

4. In the above backdrop, we take note of the undisputed factual position corroborated by documentary evidences on record to understand the nature of transaction carried out by the assessee. These facts are extracted from the submissions made by the assessee before the authorities below, content of which forms part of the respective orders of the authorities below:

(A)

7,80,910 shares of SRUIL were issued to the assessee on preferential basis on application towards subscription of share warrants at Rs 140/-per share, for Rs 10,93,27,400/- on 10.02.2010.

(B)

SRUIL directly allotted the shares to the assessee. Assessee has enclosed copy of letter of allotment of equity share warrants of SRUIL along with warrant certificate.

(C)

Assessee sold 7,80,910 shares of SRUIL to Rotunda Capital & Finance (1) Pvt Ltd (RCFPL) during the year under consideration. The said shares were sold offline to RCFPL and Securities Transaction Tax (STT) was not paid on sale of shares of SRUIL to RCFPL.

(D)

The shares of SRUIL were sold offline at Rs 80/- per share as on 31.03.2017 for which it was submitted that the market value of equity share of SRUIL was Rs 62.55 per share as on 31.03.2017.

(E)

Shares of SRUIL so allotted are duly reflected in the DMAT account of the assessee and in the books of accounts of SRUIL for which assessee submitted that this proves the genuineness of purchase of shares of SRUIL.

(F)

Assessee had taken loans from (RCFPL) in preceding previous years which is evident from the financial statement of the assessee.

(G)

As per understanding between the assessee and RCFPL, assessee sold 7,80,910 shares of SRUIL to it at Rs. 80/- per share on 31.03.2017, totalling to Rs. 6,24,72,800/- which was adjusted towards repayment of outstanding loan.

(H)

Assessee has submitted that after selling 7,80,910 shares of SRUIL to RCFPL, it is still liable to make payment of balance outstanding loan to RCFPL of Rs.6,62,35,716 as on 31.03.2017.

(I)

Assessee has submitted that SRUIL is in the business of real estate, the market value of share price of SRUIL as on 31.03.2017 was Rs 62.55 per share, the company was performing well and it was expected for increase in share price of SRUIL. After selling 7,80,910 shares of SRUIL, the share price of SRUIL has come down to Rs. 37/- as per last traded rate at BSE on 21.03.2018.

(J)

Assessee has submitted that it sold 7,80,910 shares of SRUIL at higher rate of Rs 80/- to RCFPL in spite of having the market rate as on 31.03.2017 of Rs 62.55 per share which was beneficial for the company.

(K)

Assessee incurred a loss of Rs.4,68,54,600/- on the above transaction which it has not claimed for set off and carry forward in its return filed for the year under consideration.

(L)

Ld. Assessing Officer doubted the genuineness of this transaction because in the DMAT statement, the closing balance of no. of shares of SRUIL as on 31.03.2017 was shown at 22,15,322 i.e. same as the opening balance of shares and that SRUIL shareholding pattern also remained unchanged as on 31.03.2016 and on 31.03.2017.

4.1. In order to explain the genuineness of the transaction, more particularly the anomaly pointed out by the ld. Assessing Officer, it was explained that quantity of shareholding remained same because share transfer form was not lodged with the company, i.e., SRUIL as the sale transaction was carried out on 31.03.2017 between the assessee and RCFPL. It was on this account that there was no movement of shares of SRUIL in the DMAT account of the assessee in the year under consideration.

4.2. After taking into account the submissions as stated above, the sale consideration in respect of the stated sale transaction was treated as unexplained credit for which the addition was made in the hands of the assessee. In order to affirm the above stated factual position on the movement of shares of SRUIL in the DMAT account of the assessee in the year under consideration, a specific query was raised by the Bench to the ld. Counsel of the assessee to highlight this from the DMAT account statement. To this effect, ld. Counsel submitted that the DMAT account statement is not available on record. However, he referred to note no.2 to the financial statements of SRUIL as on 31.03.2017, wherein in note-2(c), details of shareholders holding more than 5% shares in the company was reported. Ld. Counsel made an attempt to justify the movement of share to SRUIL by drawing an inference from the disclosure made in note-2(c), without bringing on record the DMAT account statement, which is the sole and conclusive evidence to establish the movement of shares in the sale transaction claimed by the assessee.

4.3. Also, in respect of movement of funds in relation to change in the outstanding balance loan taken by the assessee from RCFPL, assessee had submitted that it had only one bank account, with Central Bank of India which was closed on 12.02.2016. There are no entries of movement of funds in respect of transaction with RCFPL as submitted by the assessee. In fact, assessee has explained about how it has accounted for the two transactions undertaken by it of sale of shares to RCFPL and reduction of its outstanding liability with it by explaining the accounting entry passed by it. Assessee had submitted that for the sale of shares of SRUIL, at the rate of Rs.80/- per share off line, it did not credit any sum towards sale consideration but reduced the outstanding amount of loan from RCFPL as it was short of funds to repay the same. The accounting entry so passed as explained by the assessee is extracted below:

Rotunda Capital & Finance (1) Pvt Ltd (DR) ….Rs 6,24,72,800

Long Term Capital Loss on sale of Shares (DR) ….Rs 4,68,54,600

To, Investment in Shree Ram Urban (CR) .Infrastructure Limited ….Rs 10,93,27,400

4.4. From the above, it is noted that there is a credit entry in the account of investment of SRUIL with corresponding debit in the outstanding loan account with RCFPL and the balance resulting into LTCL on sale of shares which is reported in the return filed by the assessee. This LTCL is not available to the assessee for set off and carry forward, as the return filed by it is belated one, u/s. 139(4).

5. In the above gamut of transaction undertaken by the assessee with RCFPL, it is explained that it was not in a position to repay the loan obtained from RCFPL and therefore, arrived at an understanding to sell the shares of SRUIL offline at Rs.80/- per share as on 31.03.2017 to RCFPL and offset the outstanding loan.

5.1. On the above stated facts, we note that shares forming part of the impugned sale transaction are of a company listed on the recognised stock exchange, regulated by SEBI guidelines. It is an undisputed fact that shares of a listed company are traded through movement in the DMAT account as these are accounted for in the DMAT account and cannot be transferred physically. Further, any movement of shares of a listed company through DMAT account are subjected to STT which in the present case is missing. What appears from the conduct of the assessee in executing the aforesaid transaction is the window dressing of its balance sheet without actually undertaking transfer of shares by actual movement from its DMAT account and reduction of its loan liability without actual movement of funds through its bank account.

5.2. In this regard, it is important to take note of the observations of ld. CIT(A) in para-8 which to our dismay holds the transaction as genuine, since according to him, “all other requirements for making this transaction as genuine are satisfied”. We fail to understand, what are “all the other requirements” which he has considered and examined with corroborative evidences and corresponding relevant regulatory framework to come to a conclusion that the transaction undertaken by the assessee is genuine, more particularly, when there is no actual transfer of shares of SRUIL by way of movement through DMAT account and no movement of funds in the bank account. In para-12, ld. CIT(A) holds that assessee has satisfactorily discharged its onus of proving the genuineness of sale of shares of SRUIL to RCFPL for Rs.6,24,72,800/-and deleted the addition made by ld. Assessing Officer.

5.3. We are unable to understand how and by what means and measures, assessee has satisfactorily discharged its onus, when there is no actual movement of shares from the DMAT account, more particularly when assessee itself has confirmed that it did not file/lodge share transfer form with SRUIL for its claim of sale of shares. The doubt raised by the ld. Assessing Officer on the genuineness of the transaction in view of above stated factual position remains to be established, is justified. We find that, since there is no actual movement of shares from the DMAT account for the claim of sale of shares to RCFPL, there is no transfer within the meaning of section 2(47) of the Act and therefore, there cannot be any gain or loss which could arise, subjecting it to tax.

5.4. Also, in the given set of facts, it is a case where assessee has by way of engineering this transaction, accounted for a loss scenario by way of LTCL which again has not been claimed for setoff and carry forward by filing of a belated return u/s. 139(4). This stand of the assessee makes the said arrangement revenue neutral. The only leg which remains to be addressed is the reduction of the loan liability in the hands of the assessee because of this engineered transaction for which there is no movement of funds in the bank account.

6. In the given set of facts and the arrangement made by the assessee which it has duly affirmed in all of its submissions made at all the stages of the proceedings, we are of the view that such a reduction in the loan liability made, is only for the purpose of window dressing of the balance sheet and would not lead to generation of income in the hands of the assessee subjecting it to tax under the provisions of the Act. Neither, the sale transaction of shares of listed company SRUIL online nor reduction of loan liability by way of adjusting the sale consideration of the sale of shares of SRUIL results into any real income to be brought to tax u/s. 4 and 5 of the Act in the hands of the assessee. We find that there is no DMAT statement to demonstrate actual movement of shares which is corroborated by submission of the assessee itself that no share transfer form was lodged with SRUIL. There are no contract notes, broker confirmation nor any stock exchange trade data. Also, there is no supporting bank trail for movement of funds, all of which has led the ld. Assessing Officer to draw an adverse inference to treat the claimed sale consideration of loss as non-genuine because there is no real transfer of shares in terms of companies Act, SEBI regulations or the definition of transfer u/s. 2(47) of the Act. These shares continue to remain with the assessee in its DMAT statement with the assessee being the legal owner and the outstanding loan liability also continues without any reduction as there is no movement of funds nor actual sale consideration available for want of actual transfer. Assessee has merely passed an internal accounting entry. In our view, there is no real income and no real reduction in loan liability and therefore, there cannot be any adverse addition in the hands of the assessee merely because it attempted to reflect a reduction in loan liability by notionally selling the shares.

6.1. To our mind, at most, what is required is the correction of the balance sheet as presented by the assessee for the year under consideration but certainly, there cannot be a tax liability by disallowing the non-existent loss. The burden of proof lies on the assessee to substantiate the claimed transfer, mere reduction of loan in the balance sheet without matching securities and banking trail is insufficient. Absence of DMAT statement and bank evidence are strong proof that the alleged sale is not-genuine.

6.2. Mulling on the ultimate outcome of this issue before us, we find that if the appeal is allowed by deleting the addition made in the hands of the assessee, it leads to affirming the grossly incorrect factual position portrayed by the assessee in its balance sheet. Therefore, the issue cannot be held in favour of the assessee. If we are to dismiss the grounds of the assessee on this issue, it would lead to sustaining the addition made by the ld. Assessing Officer which on a real income theory would not sustain as there is no real income and no real loss but a mere facade created by the assessee by window dressing of its balance sheet. In view of the foregoing, we find it appropriate to remit the issue back to the file of ld. CIT(A) for re-vising the entire case, so as to understand and list down in clear speaking terms, what all requirements he contemplated in para-8 of his first appellate order, based on which he arrived at a conclusion that the transaction undertaken by the assessee is genuine. It is directed to de novo adjudicate by taking into consideration the provisions of Companies Act, SEBI regulations and the relevant provisions of the Act. Further, it is also not discernible from the material placed on the record, whether subsequently assessee had actually lodged the share transfer form with SRUIL and the transaction as claimed has actually transpired in the subsequent period. This aspect of the issue be also looked into by the ld. CIT(A) and accordingly treatment may be given as per the provisions of the Act. Assessee is also directed to be forthwith in furnishing all the required documentary evidences to portray the correct picture, which is factually verifiable. Thus, in the ultimate, we conclude to remit the matter back to the file of ld. CIT(A) in terms of above stated observations and findings. Accordingly, ground raised by the Revenue in this respect are allowed for statistical purposes.

7. Ground no.2 raised by the Revenue is in respect of unexplained expenditure u/s. 69C of Rs. 6,50,000/- which has been deleted by ld. CIT(A). In this regard, fact of the matter is that assessee has written off balance of Rs.6,50,000/- standing in the name of Shah Casting Pvt. Ltd. Contention of the assessee is that it has already disallowed all the expenses which were debited to Profit and Loss including the sundry balance written off, which included Rs.6,50,000/-. According to the assessee, ld. Assessing Officer has incorrectly applied section 69C as assessee did not incur any expenditure which falls within the meaning of section 69C. It is a case of writing off a debit balance standing in the name of Shah Casting Pvt. Ltd. Ld. CIT(A) has verified the factual position in this regard and deleted the addition made by the ld. Assessing Officer. From the perusal of the material placed on record, as contained in the paper book, we do not find any reason to interfere with the findings arrived at by the ld. CIT(A). Accordingly, ground no.2 raised by the Revenue is dismissed.

8. In the result, appeal of the Revenue is partly allowed.

Order is pronounced in the open court on 23 July, 2026.