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Judgment
ORDER
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER :
This captioned appeal has been filed by the learned CIT(A)-NFAC, Delhi order dated 28.03.2025 arising from the assessment order under section 147 read with section 144B of the Income tax Act, 1961, dated 20.03.2024, for the A.Y. 2016-17.
Brief facts of the case are that the assessee is a private limited company, had filed return of income showing Income of Rs.2,56,70,763/-. On the basis of the Directorate of Income Tax (Inv.), Mumbai report regarding misuse of the stock market platform for generating manipulative trades in derivative segment for providing bogus loss and profit, the AO re-opened the case of the assessee. The Report identified two such penny stocks, Goenka Business and Finance Limited (GBFL) and Ejecta Marketing Ltd. (EML) which are bogus penny stocks used for providing bogus LTCG. The assessee company had also made sale and purchase of two such penny stocks naming EML and GBFL amounting to Rs. 8,49,760/- during the F.Y. 2015-16 relevant to A.Y. 2016-17. Thus, the AO held that the assessee had claimed bogus LTCG/STCL amounting to Rs. 8,49,760/- during A.Y. 2016-17.
The AO, after following the procedure laid down in section 148A, passed an order u/s 148A(d) of the Act after recording reasons for reopening of the case and obtaining approval from the specified authority u/s 151 of the Act. In response to the notice u/s 148, the assessee has filed its return of income on 27.04.2023. Thereafter, the AO issued notice u/s 143(2) of the Act. Subsequently, the AO issued notices u/s 142(1) dated 04.10.2023 and 08.09.2023 along with questionnaire. In response, the assessee filed its reply. The AO issued detailed show-cause notice on 27.02.2024 against which the assessee furnished its submissions. After detailed discussion, the AO made the following additions:
Trading in GBFL & EML (penny stocks) : Rs. 8,49,760/-,
Trading transactions related to Alankit Ltd. : Rs. 5,02,968/-,
Trading transactions related to M/s. PMC Fincorp Ltd. : Rs. 4,43,842/-,
Trading transactions related to M/s. Excel Castronics Ltd. : Rs. 1,66,76,200/-,
Trading transactions related to Fictitious profits : Rs.72,553/- and
Unsecured Loan from Shri Jignesh Shah : Rs. 10,80,474/-.
Aggrieved, assessee was in appeal before the CIT(A)/NFAC. In which, the learned CIT(A)/NFAC gave direction to delete the impugned additions.
Aggrieved by the order of learned CIT(A)/NFAC, Revenue is now in appeal before us with the following grounds:
1.“On the facts and circumstances of the case, the Ld.CIT(A) has erred in deleting the addition of Rs.1,84,72,770/- on account of unexplained cash credit u/s 68 of the IT Act without appreciating the fact that all the circumstantial evidence points towards transactions being made to manage the bogus LTCG & STCG.
2.On the facts and circumstances of the case, the Ld.CIT(A) has erred in deleting the addition of Rs.11,52,867/- on account of unexplained cash credit u/s 68 of the IT Act without appreciating the fact that non genuine transactions were made under the garb of the fictitious profits in Equity/Derivative.
3.The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”
The ld DR vehemently supported the order of AO whereas the ld counsel of the assessee relied on the orders of the CIT(A).
We have heard the rival submissions and perused the materials on record. We find that on the issue of addition of Rs 1,84,72,770/-, the CIT(A) has held as under:
8.4.The impugned addition of Rs. 1,84,72,770/- pertains to the trading transactions made by the appellant in 4 penny stocks (GBFL & EML Rs. 8,49,760/-, Alankit Ltd. Rs. 5,02,968/-, PMC Fincorp Ltd Rs. 4,43,842/- and Excel Castronics Ltd Rs. 1,66,76,200) identified by the investigation Wing of the department during the search action on different groups involved in the activities of providing accommodation entries through LTCG, Bogus loss, Unsecured loans etc. It is evident from the facts of the case that the appellant has not shown any Long Term Capital Gains on account of purchase & sale of the penny stocks under reference. The appellant has not made any long term investment in the above penny stocks. In most of the transactions, the appellant has done day trading of the stocks or in case of some transactions holding period is of few days. Therefore, in most of transactions, the purchase shares were not credited to the demat account of the appellant company.
8.5.During the assessment proceedings, the appellant had strongly contended that it had not made any investment in the said penny stocks neither it had declared any LTCG claiming exemption u/s 10(38) of the Act. The Appellant has not claimed any LTCG/STCG/LTCL/STCL in its computation of income during the relevant assessment year which is evident from the computation of income of the Appellant. To substantiate its claim the appellant had furnished copy of trading summary with respect to each transaction in the shares of the penny stocks under reference. During the appellate proceedings, the appellant has furnished the same documents which has been perused and considered carefully. The AO had accepted the veracity of the trading summary filed by the appellant and could not point out any adverse inference in this regard. However, he has made impugned additions for the reason that the appellant company had traded in the identified penny stocks. The companies identified as penny stocks by the Investigation Wing or SEBI are listed companies on BSE / NSE. Trading or making investment in such stocks are not illegal per se unless it is proved that the trading entity is involved in manipulated transactions and thereby benefited with undue advantage to evade its tax. In the instant case the appellant company has traded in the penny stocks under reference just like it had traded in number of other stocks. All transactions have been done online. Trading results are also mixed, in some cases the appellant has earned profits and in some other cases it has incurred loss also. The net result of such trading has been accounted for by the appellant in its Profit and Loss account on which the appellant has already paid tax.
8.6.The company is a member of capital market and F&O segment of National Stock Exchange of India Ltd (NSE), Bombay Stock Exchange (BSE) etc. and is a Depository Participant (D.P) of National Securities Depository Ltd. (NSDL) and a Member of Central Depository Services (India) Ltd. (CSDL). Apart from broking and depository services, the Appellant company is actively engaged in the business of purchase & sale of shares/Derivatives/ Future and Option for self and for clients. It is noted that all the transactions are done by the Appellant through the stock exchange including those transaction done in shares mentioned in the notice that are consolidated in a single trading account on a daily basis on net settlement basis. Further the income has earned and/or loss suffered on the transactions done by the Appellant for self, is treated as normal business income by the Appellant company. The Factual documents such as the trading account, demat account, trade summary and bank statements show that the transactions have been carried out in the normal course of business.
8.7.The modus operandi explained by the AO in the assessment order while widely being used for claiming bogus LTCG/STCG/STCL may not hold good in the facts of the appellant. On a perusal of the record, it is easily discernible that in the instant case, that the AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income Tax penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. There is nothing adverse to comment on the above analysis, but there arises a concern with the axiomatic conclusion drawn by the AO that the appellant has also done accommodation entries for claiming fictitious LTCG, which is exempt under Section 10(38), in a pre-planned manner to evade taxes without further corroboration on the basis of cogent material.
8.8.Reliance in this regard is placed on the judgement of the Hon’ble High Court of Delhi in the case of PCIT versus Bindu Garg (2022) 115 CCH 0304 and PCIT vs Krishna Devi (2021) 319 CTR (Del) 168, both of which cases related to trade in penny stocks in which it was held that any addition made merely on the basis of report of investigation wing without any independent enquiry by the AO is bad in law. Further, in the case of the addition of transaction in PMC Fincorp Ltd and Excel Castronics Ltd, the appellant has submitted that it has incurred a loss that does not warrant addition under section 68 as there is no cash credit which is apparent the documents submitted by the Appellant. In the case of addition of the alleged fictitious profit, the appellant has already paid tax on the same at the highest tax rate by including the amounts in its P&L account, therefore, making addition on the same transactions tantamount to double taxation.
8.9.In view of discussion in paragraph 8.3 to 8.8 above, I am of the considered opinion, that the additions of Rs. 1,84,72,770/- on account of trading transactions made by the appellant in 4 penny stocks (GBFL & EML Rs. 8,49,760/-, Alankit Ltd. Rs. 5,02,968/-, PMC Fincorp Ltd Rs. 4,43,842/- and Excel Castronics Ltd Rs. 1,66,76,200/-) are not justified. Therefore, the AO is hereby directed to delete the impugned additions.
On the issue of deletion of cash credit of Rs 11,52,867/-, the CIT(A) has held as under:
9.1.In ground no. 10 & 11 the appellant has agitated against the addition Rs 11,52,867/- on account of alleged transaction with entities of Sh Jignesh Shah in form of unsecured loans. The AO has made an addition of Rs. 72,453/- on account of fictitious profits from trading transactions in equity/derivatives as the appellant was not able to identify the name of the script(s). Similarly, the AO has held that the appellant has failed to explain the source of Rs. 10,80,414/- credited in its account. Therefore, the AO held that the appellant had taken unsecured loans of Rs. 10,80,414/- from non-discrete entity managed and controlled by Shri Jignesh Shah, a known accommodation entry provider. The appellant categorically denied to enter into any transaction with the entities under the control of Sh. Jignesh Shah or with Sh. Jignesh Shah himself. However, the AO made the additions of Rs. 72,453/- and 10,80,414/- u/s 68 of the Act.
9.3.1.A perusal of the assessment order shows that the AO has made the impugned addition of 11,52,867/- (Rs 10,80,414/- + Rs. 72,453/-) on account of unsecured loans taken by the appellant company from non-descript entities controlled and managed by the Shri Jignesh Shah, an accommodation entry provider. In its submission, the appellant has pointed out that in the show cause notice under section 148A(b) the AO had mentioned that the appellant had taken unsecured loans from the non-descript entities under control of Sh. Jignesh Shah. But during the assessment proceedings, the AO could not provide any proof demonstrating that the appellant company has actually taken such unsecured loans. Lastly, the AO made the impugned addition holding it as unexplained credit in the books of the appellant but could not point out as to how and from whom this money was received by the appellant.
9.3.2.In its written submission the appellant company has raised technical issue referring some case laws. I considered carefully the submission of the appellant with legal propositions referred by it. Apart from the case laws relied upon by the appellant, some other judicial pronouncement is relevant to mention here. Hon’ble Delhi High Court in the case of ATS Infrastructure Ltd vs ACIT held that if there is difference in reasons recorded show cause notice u/s 148A(b) and final order u/s 148A(d), entire reopening would be invalid. *****
9.3.3.In the case of PCIT vs Naveen Infradevelopers & Engineers Pvt. ltd. ITA 524/2024 (16.10.2024) Hon’ble Delhi High Court held as under: “Undisputedly, the controversy involved in the present case – whether any addition can be made by the AO pursuant to initiation of re-assessment proceedings, notwithstanding that no addition is made on the grounds on the basis of which the assessment was reopened – is covered by an earlier decision of this Court in Ranbaxy Laboratories Ltd. v. Commissioner of Income Tax: 2011 336 ITR 136 (Delhi). The said issue was also considered by this Court in the recent decision of ATS Infrastructure v. Assistant Commissioner of Income Tax, Circle 1 (1) & Ors.: 2024 SCC On Line Del It is not disputed that the questions of law, as projected, are covered in favour of the assessee by the said decisions.”
9.3.4.In case of Dinesh Singla vs ACIT WP(c) 19667/2021 judgment dated 02.09.2024 on issue of validity of impugned reopening action u/s 148 held as under: “When an authority is empowered to exercise and pass orders in terms of the Act, it has to remain within four corners of the manner in which the said power is required to be exercised. Once the basis of reopening of the case u/s 147 of the Act is non disclosure of income under capital gain and non disclosure of source of investment , the AO has no authority available in law to pass order holding that the income had escaped assessment following as “adventure in nature of trade” (Delhi high court decision in case of Banyan Real Estate Fund Mauritius (supra) Applied).
9.3.5.In view of the above judicial precedents pronounced by the jurisdictional high court, the addition made by the AO on account of unsecured loans allegedly taken by the appellant is not justified as the appellant from the very beginning, asked the AO to supply the basic detail of the entity from whom the appellant had allegedly taken the unsecured loans under reference. But the AO maintained that the appellant had taken unsecured loans from the non-discrete entities controlled and managed by Shri Jignesh Shah. But finally he had made the impugned addition on account of unexplained credit in the books of the appellant.
9.3.6.In view of the discussion on the facts of the case, findings of the AO and relevant judicial precedence, in paragraph no. 9.3.1 to 9.3.5. above, I am of the considered opinion that the addition of R s. 11,52,867/- (Rs. 10,80,414/- + Rs. 72,453/-) u/s 68 of the Act on account of unexplained credit in form of unsecured loans is not justified. Therefore the AO is hereby directed of deleted the impugned addition of Rs. 11,52,867/-. Accordingly, ground no. 10 & 11 of the appeal stand allowed in favour of the appellant.
9.In result, the appeal of the appellant is partly allowed
We have heard the rival submissions and have perused the materials on record. We note that the impugned addition of Rs. 1,84,72,770/- pertains to the trading transactions made by the assessee in 4 penny stocks (GBFL & EML Rs. 8,49,760/-, Alankit Ltd. Rs. 5,02,968/-, PMC Fincorp Ltd Rs. 4,43,842/- and Excel Castronics Ltd Rs. 1,66,76,200). Though these are penny stock, the clinching finding of fact given by the CIT(A) remains unrebutted that the assessee has not taken benefit of LTCG or exemption u/s 10(38), Bogus loss, Unsecured loans etc on account of purchase & sale of these penny stocks. The AO not only accepted the veracity of the share trading summary, he also could not point out any adverse inference in this regard with any cogent evidence. We concur therefore, with the CIT(A) that the impugned addition are made merely for the reason that the assessee had traded in the identified penny stocks. We further note that the assessee has traded in such stocks from where it has earned profits as well as loss and the same is accounted for in its Profit and Loss account on which the assessee has paid tax. Moreover, the findings of the CIT(A), that the assessee’s documents such as the trading account, demat account, trade summary and bank statements show that the transactions have been carried out in the normal course of business, has also not been rebutted at all by the Revenue. We therefore find no reason to interfere with the reason of the CIT(A) that the analysis of the Investigation Wing of the Income Tax, donot automatically lead to the axiomatic conclusion that the assessee’s transactions in penny stock is to avail fictitious LTCG, exempt under Section 10(38) of the Act. In view of discussion above, the impugned additions of Rs. 1,84,72,770/- on account of trading transactions are directed to be deleted. Ground 1 is dismissed.
On the issue of deletion of cash credit of Rs 11,52,867/-, we note that the CIT(A) has found for a fact that the AO failed to demonstrate that the assessee has actually taken such unsecured loans or establish as to how and from whom this money was received by the assessee. In view of the above, we are of the considered view that there is no reason to interfere with the decision of the CIT(A). The impugned additions are directed to be deleted. Ground 2 is dismissed. 11. In the result, the appeal in ITA 3303/Del/2025 is dismissed.