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Judgment
PER SUDHIR KUMAR, JUDICIAL MEMBER:
This appeal is preferred by the assessee against the order dated 17.04.2025 of the Commissioner of Income tax, Appeal Delhi-23 [hereinafter referred to as “Ld.CIT(A))”] passing against the assessment order dated 28-12.2027 for the assessment year 2015-16 u/s 143(3) of the Income Tax Act 1961[hereinafter referred to as “the Act”]
The brief facts of the case are that the assessee filed his return of income for the A.Y.2015-16 on 30-09-2015 declaring total income at Rs.3,68,590/-. However, Tax has been paid on Book Profit under section 115JB of the Act at Rs. 1,12,03,297/-The case of assessee was processed under section 143(1) of the Act. The case of the assessee was selected for complete scrutiny through CASS and notice under section 143(2) of the Act dated 13-04-2026 was issued and duly served upon the assessee. Thereafter, statutory notices under section 142(2) of the Act along with questionnaire were issued to the assessee. In compliance to the notices, Shri Pawan Kumar Accountant & Authorized representative of the assessee attended the proceedings and furnished the written submissions. According to Assessing Officer the assessee has earned LTCG on sale of shares of M/s. channel Nine Entertainment Ltd. during the year under consideration. The Assessing Officer found that the assessee has used a prearranged device in form of booking of Bogus LTCG of amount of Rs.3,50,75,288/- during the relevant year to bring into books their unaccounted income and make the addition of Rs. 3,60,74,925/- under section 68 of the Act as unexplained income. The Assessing Officer also made the addition of 5% commission of the said amount Rs.18,03,746/-and penalty proceedings also initiated.
Aggrieved the order of the Assessing Officer the assessee filed this appeal before the Ld. CIT(A) who vide his order dated 17-04-2025 dismissed the appeal. Being aggrieved the order of the Ld. CIT(A) the assessee raising the following grounds filed this appeal:-
1.That the Ld. CIT(A) has erred in law and on facts in not quashing the assessment order dated 28-12-2017 passed under section 143(3) of the Income Tax Act,1961 (“the Act”) which is illegal and bad in law.
2.That the Ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 3,60,74,925/- made by the Ld. AO u/s 68 of the Act on account of long -term capital gain arising from sale of shares of M/s Channel Nine Entertainment Limited and M/s Nouveau Globel Ventures Limited, which was claimed as exempt by the appellant u/s 10(38) of the Act, by erroneously treating the same as non -genuine.
2.1That the Ld. CIT(A) has failed to appreciate that the impugned addition was solely based on suspicion conjecture and surmise without due consideration of the submissions and supporting documents provided by the appellant to substantiate the genuineness of his claim.
2.2That the Ld. CIT(A) has erred in not appreciating that the appellant acted as a market maker for the scrip of Channel Nine Entertainment Limited and that the acquisition of shares was under taken in fulfilment of the obligation of a market make.
2.3That the Ld. CIT(A) has failed to apricate that the AO did not conduct any independent inquiry and merely relied upon the ESBI information as irrefutable evidence against the appellant
2.4That the ld. CIT(A) erred in holding that the transaction of sale of shares of Nouvea Multi was a sham transaction and in the nature of accommodation entry.
3.That the Ld. CIT(A) has erred on facts as well as in law in confirming the addition of Rs.18,03,746/- made by the ld.AO u/s 69C of the Act on account of alleged commission @ 5% paid on the long- term capital gain, which was erroneously treated as penny stock transaction in the assessment order.
3.1That the Ld. CIT(A) has failed to appreciate that the impugned addition was purely based on suspicion, conjecture and surmise and there was no evidence in possession of the AO to indicate that appellant had paid such alleged commission @ %% in connection with the aforesaid gains.
4.That the appellate reserves the right to add, alter vary, omit substitute or amend any ground of appeal at any time before or at, the time of hearing f the appeal, so as to enable the Hon’ble ITAT to decide the course of appeal according to the law.
Ground number-1 is general in nature need not to be adjudicate.
Ground No.2 to 2.4:
The Ld. AR of the assessee submitted that assessee is accompany engaged in the business of stock broking and trading in securities and is a registered trading member of the National stock Exchange of India Limited(“NSE”) and Bombay Stock Exchange Limited (“BSE”), authorized to under take purchase and sale of shares and securities both on its own account and on behalf of its clients. The assessee is also registered as an SME Market Maker and forms of the panel approved Market Makers recognized by the Stock Exchange for providing liquidity in securities listed on the SME platform. He further submitted that the assessee has regularly dealt in multiple scrip over the years and not a one- time investor. The Assessing Officer also recorded in the assessment order that the assessee had earned gains as well as suffered losses on the long-term investments. He further submitted that M/s Channel Nine Entertainment Limited came out with an Initial Public offer of 46,68,00 equity shares of face value Rs.10/-each at an issue price of Rs.25/- per share, aggregating to Rs.11.67 Crores. It is also submitted that as per the SME listing requirements a portion of these issues comprising 2,40,000 equity shares was specifically reversed for subscription by the designated Market Maker to the issue, which were subscribed to the assessee at the issue price of Rs.25/- because prior to the IPO the assessee entered into a Market Making agreement dated 16-01-2013 with CNEL whereby the assessee was appointed as the designated Market Maker for the shares proposed to be listed the SME platform of BSE. The assessee has paid the subscription amount through banking channels and duly credited to Demat account.
It is also submitted that as per the SEBI circular dated 09-03-2012 the Market Maker is statutorily obligated to provide continuous liquidity in the scrip by maintaining two-way quotes i.e. both buy and sell quotations for a minimum prescribed percentage of trading hours. The genuineness of the assessee as Market Maker role is further corroborated by this fact that the Stock Exchange had imposed the penalties upon the assessee for non-compliance with market-making requirements when its holdings fell below the prescribed threshold.
The Ld. AR also submitted that when the Revenue accepted the purchases as genuine then resultant sale consideration and the long-term capital gains arising therefrom cannot be doubted. The Ld. Assessing Officer has accepted the acquisition of share of CNEL which was made in the pursuant to its appointment as a designated Market maker and in the compliance of statutory frame work prescribed by SEBI, BSE and SME then sale cannot be treated as non-genuine or as an accommodation entry. The sale of shares was made through recognized stock exchange mechanism, supported by contract notes, demat records and banking channels. He assessee has proved the sale is genuine by filling the relevant documents as, demat account details. The assessee has made the sale and purchase of the shares continuously (Paper Book page 50). It is also submitted that the long-term capital gain arising from the sale of shares of M/s Nouveau Globel Ventures Limited is merely Rs. 2828/-. Which is a negligible quantum of gain and assessee should not take an accommodation entry for a such small amount. Reliance is placed on the following judgements as under:-
Rachna Gupta v. ACIT Central Circle Delhi ITA NO. 2531/Del/2022 (ITAT Delhi)
Amit Rastogi HUF v. ITO ward1(1) Meerut ITA No. 2128/Del/2018 (ITAT Delhi)
Nirmal Gupta V. Pr. CIT -9 New Delhi ITA No. 108/Del/2018 (ITA Delhi)
In the case of Shri Birendra Singh Nirbhay v. ITO Ward-3(1) in ITA No. 704/JPR/2024 the Co-ordinate Bench accepted the genuineness of long -term gains arising out from sale of shares of M/s Channel Nine Entertainment Ltd. and allowed the claim of exemption of the assessee. The relevant retract of the order is reproduced below :
On careful consideration of orders of both the lower authority, the bench noted that the issue that has been discussed while confirming / making addition was of the report of the investigation wing wherein the purchases were made from the brokers and there is no reference to the application of made by the public at large on IPO application. The payment of the application money were by an account payee cheque for an amount of Rs. 1,50,000/- drawn on HDFC Bank. There is no finding that the money so paid by normal banking channel has reached in that IPO process. No statement of the broker or that of the entry provider states that the IPO process were not in accordance with the law. Even there is no finding of the SEBI on that process of IPO being held not genuine. The revenue alleged broker undertake off market sale, pre IPO sale, purchase through fake contract note. All these allegations are not applicable to the present case as the assessee purchased the share through a process of IPO. Here the counter part is traceable as the application is made by a valid process of IPO. How a retired person not having any source of business can pay in advance and thereby the sale proceeds received in his bank account this allegation is mere here say and no evidence were supplied or placed on record. Every company who make the IPO cannot be said to shell company when that come through IPO process. The assessee based on the prospect and advertisement in public domain has availed the offer of IPO and thereby the assessee was allots shares. There is no involvement of any broker and fake contract note for this purchase. Thus, the allegation of the revenue is general without considering the facts of the case on hand. Even the shares that the assessee received were remain available for more than 12 months in the demant account itself and that is sufficient proof to avail the benefit as available as per provision of section 10(38) of the Act. We are afraid if such a way, we take a view that the gain arrived by a valid process be considered as bogus gain and unexplained then the mess will be created no corporate entity will get the capital and the purpose of capital market will vanish. The contention of the revenue that the assessee never met to the broker is also not correct because the assessee has sold the shares through a mediator HDFC Securities Limited the assessee may not met that broker but definitely after completing the KYC process opened the demat and trading account with that broker and there is no finding of the investigation team that the HDFC Securities Limited were part of the price ragging process. Thus, the based on the presumption and assumption the additions were made are not prevailing the in facts of the case discussed herein above and therefore, the facts of the case of the Swati Bajaj and other relied upon by the revenue has different facts are not related to the process of sales through the IPO. Thus, based on the evidence as discussed herein above revenue could not discharge there burden that based on the evidence placed on record by the assessee how the gain earned by the assessee be considered as bogus where there is no evidence placed on record on the allegation that has been made by the revenue and thereby merely based on the surmises and conjectures as reported in the investigation report and that too without looking to the facts of the case simply the facts of the investigation report cannot be applied when the facts are totally different. Thus, the long -term capital gain that that is claimed as exempt u/s 10(38) of the Act cannot disbelieved in the hands of the assessee. The assessee has subscribed for equity shares of the Company “Channel Nine Entertainment Limited” and consideration was paid through banking channel and these shares have duly been credited in the Demat account with HDFC Securities Limited. The equity shares so acquired have duly been sold online through Stock Exchange at real time price after paying the Security Transaction Tax (STT). The Company “Channel Nine Entertainment Limited” is listed company, which was active and shares thereof were available for trade online at the time of assessment proceedings itself sufficient proof of existence and duly authorized, permitted and valid script freely tradable in public at large. The shares of the company were available at online trading plate-form even at the time of assessment proceedings. The screenshot evidencing this trading was also submitted by the assessee to the Ld CIT (A) at the time of appellant proceedings. It is pertinent to mention that the governing and regularity body ‘SEBI’ had issued an order dated 29/06/2015 and 04/01/2016, where-in it had restrained in the dealing of equity shares of various companies, which includes CHANNEL NINE ENTERTAINMENT LIMITED. The SEBI had not pointed any violation of provisions of SEBI ACT and SEBI (Prohibition of fraudulent and unfair trade practices relating to Securities market) Regulation 2003 and had revoked the earlier order issued in the case and thus it does not appear as Penny Stock not only that the capital acquired by that capital through process of IPO was not considered as invalid. Hence, in view of the facts and circumstances of the case, we do not concur with the findings of the ld.CIT(A) on the issue in question. Thus, the Ground No. 1 of the assessee is allowed.
The Ld. Sr. DR relied upon the orders of the lower authorities. He submitted that the assessee has acquired shares of CNEL through preferential allotment and thereafter sold them upon expiry of the lock -in period to earn artificial gains. In appeal the Ld. CIT(A) has not found that the transaction was genuine.
We have heard the parties and gone through the material available on record. In the present case the assessee was acting not an investor but acting as a registered stock broker approved SME Market Maker. The assessee file paper (paper book page-101) to prove that the assessee was designated as a Market Maker in the scrip Channel Nine Entertainment Limited as per the notice no 201130311-7 dated 11-03-2013. We also observed that the assessee has filed the documentary evidence to establish that the assessee entered into a Market Making Agreement subscribed to the Market Maker’s reverse quota in the IPO, and regularly purchased and sold shares to maintain liquidity in the scrip. This fact also proved from the evidence (Paper Book page No.89-101) that the Stock Exchange had on certain occasions imposed the penalties upon the assessee for non -compliance with the market-making requirements when the required market- making obligations could not be fulfilled by the assessee. The assessee subscribed to 2,40,000 equity shares of the CNEL at the issue of Rs.25/- per share aggregating to Rs.60,00,000/-and the subscription amount was paid through normal banking channels and shares were duly allotted and credited to the assessee’s demat account. There are no discrepancies in the documents filed by the assessee claiming the deduction under section 10(38) of the Act. The Assessing Officer has also observed that the assessee had earned gains as well as suffered losses on the other long -term investment.
It is evident from the order that the Revenue accepted the purchases of CNEL but doubted the sale as a bogus sale. The assessee sale the such shares through the recognized stock exchange and filed the relevant documents, demat account and bank account. The revenue cannot adopt the contradictory stand by accepting the purchase as genuine and doubted the sale of the shares. The findings of the Assessing Officer that the assessee started selling the shares once lock in period was over and prices of shares of M/s Chanel Nine entertainment Ltd were artificially rigged to a very high value by the promoters of the penny stock companies is with-out any material. It is also evident that the assessee gain long term gain from the sale of shares of M/s Nouveau Globel Ventures Limited is merely Rs. 2,828/- It is not possible that assessee would made the bogus sale for that negligible amount. Thus, on the facts and in circumstances of the case we, hold that there was a genuine transaction of purchase and sale of shares on which assessee has earned Long-Trem Capital Gain and therefore, such Long-Term Capital Gain cannot be taxed under section 68 of the Act. Since Long Term Capital Gain is exempted under section 10(38) of the Act therefore, no addition is called for. Accordingly, ground no. 2 to 2.4 are allowed.
Ground No3 to 3.1 The Ld. Assessing Officer has made the addition of Rs.18,03,746- under section 69C of that Act because the assessee paid the commission to entry provider who involved in such share manipulations. The Ld. AR of the assessee submitted that the addition was made without any supportive material and without showing that the assessee paid the sum to any person by way of commission. This addition is consequential, because in the ground no. 2 the tribunal held that the Long- Term Capital Gain is exempted under section 10(38) of the Act therefore, the addition is liable to be deleted, and deleted accordingly. The appeal of the assessee is liable to be allowed.
In the result, the appeal of the assessee is allowed.