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Judgment
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘the CIT(A)’] dated 17.06.2025, for Assessment Year 2015-16.
Shri Mukesh Jain, appearing on behalf of the assessee, submits that the assessee is a practicing Chartered Accountant. The case of the assessee was reopened under section 147 r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Assessing Officer (AO) on the basis of information received from Insight Portal of the Department that the assessee had earned Long-Term Capital Gain (LTCG) from sale of shares of PMC Fincorp Ltd., alleged bogus scrip. The Id. AR, narrating facts of the case, submitted that a search operation under section 132(1) of the Act was carried out in the case of M/s. PMC Fincorp Ltd. on 11.10.2018. The said company was stated to be engaged in the business of manufacturing ferrous and non-ferrous metals. During the course of investigation, it was found that M/s. PMC Fincorp Ltd. was not carrying out any genuine business activity of manufacturing iron or steel. It was alleged that M/s. PMC Fincorp Ltd. was engaged in providing accommodation entries in the form of Long-Term Capital Gain/Loss or Short-Term Capital Gain/Loss. Admittedly, the assessee had sold shares of M/s. PMC Fincorp Ltd. aggregating to Rs.29,88,000/- during the Financial Year 2014-15 relevant to AY 2015-16. The assessee earned LTCG of Rs.29,10,376/-on sale of the said shares and claimed the same as exempt. The Assessing Officer (AO), treated the LTCG earned by the assessee on sale of shares of M/s. PMC Fincorp Ltd. as bogus and made addition of the entire amount of Rs.29,88,000/-under section 68 r.w.s 115BBE of the Act.
The ld. AR submits that the AO, during the course of assessment proceedings, referred to the statement of Shri Raj Kumar Modi, Director-cum-Operator of M/s. PMC Fincorp Ltd., wherein he had allegedly admitted to providing bogus entries of Long-Term/Short-Term Capital Gain/Loss. The assessee, during the course of assessment proceedings, requested the AO to provide a copy of the statement of Shri Raj Kumar Modi and also sought an opportunity to cross-examine him. However, the AO neither provided the statement of Shri Raj Kumar Modi nor granted any opportunity of cross-examination. The ld. AR further submits that even during the first appellate proceedings, the assessee raised an objection regarding denial of opportunity to cross-examine Shri Raj Kumar Modi. It was also brought to the notice of the First Appellate Authority that subsequently Shri Raj Kumar Modi had filed an affidavit retracting his earlier statement. The CIT(A) has recorded this fact but still proceeded to uphold action of the AO and denied the opportunity of cross-examination. The CIT(A) further observed that the subsequent retraction of statement does not vitiate the original statement recorded during the search proceedings and that the retraction appears to be an afterthought. The ld. AR placed reliance on the following decisions to contend that denial of cross-examination results in violation of principles of natural justice. Hence, the entire proceedings are vitiated. In support of his submissions, he placed reliance on following decisions:-
Abhimanyu Chaturvedi Mallika Chaturvedi, Alka Chaturvedi vs. DCIT, 118 ITR (Trib) 676 (Del); &
Andaman Timber Industries vs. CCE, 281 CTR 241/62 taxmann.com 3 (SC).
On merits, the ld. AR submits that during the course of assessment proceedings the assessee furnished various documents, viz., Demat account/transaction statement, ledger maintained by the broker, bank statement, contract notes for sale of shares, invoice evidencing purchase of shares, copies of share certificates, details of completion of transactions in shares and proof of payment of Securities Transaction Tax (STT) on sale of shares. The above documents furnished by the assessee clearly establish the transaction relating to purchase and sale of shares as genuine. The ld. AR further submits that nowhere in report of the Investigation Wing or in the statement of Shri Raj Kumar Modi, name of the assessee or the name of the assessee’s broker is mentioned. Thus, no adverse inference can be drawn from the said report or the statement of Shri Raj Kumar Modi to conclude that the assessee had indulged in any bogus transaction relating to purchase and sale of shares. The shares of M/s. PMC Fincorp Ltd. were duly purchased by the assessee and delivery of the shares was taken. The shares were duly reflected in the Demat account of the assessee and upon sale of shares, the sale consideration was received through the banking channel in the bank account of the assessee. The shares were traded on the recognized stock exchange. The ld. AR submits that the assessee has duly discharged the onus cast upon him to prove the genuineness of the transactions of purchase and sale of shares. Hence, no addition can be made under section 68 of the Act on account of sale proceeds of shares. The ld. AR further submitted that the Division Benches of the Tribunal, in various cases involving sale of shares of M/s. PMC Fincorp Ltd., have deleted similar additions made by the Revenue alleging the transactions to be bogus. He placed reliance on following decisions:
ITO vs. Megha Garg ITA No.3488/Del/2025 AY 2014-15 deciding on 17.10.2025;
Rama Mittal vs. ITO 26/ASR/2024 decided 03.06.2024; &
Ritu Jain vs. JCIT, ITA No.403/Del/2025 AY 2013-14 decided 29.10.2025.
Per contra, Shri Manoj Kumar, representing the Department vehemently defended the impugned order and submitted that PMC Fincorp Ltd. is a declared penny stock. Shri Rajkumar Modi, Director of the said company, in his statement recorded on 11.10.2018 at the time of search, admitted that he was engaged in providing bogus Long-Term/Short-Term Capital Gain/Loss through paper used for providing bogus accommodation entries. According to the ld. DR, the assessee is one of the beneficiaries of such accommodation entries. The ld. DR sought one day’s time to examine the report of the Investigation Wing and the statement of Shri Raj Kumar Modi in order to ascertain whether the name of the assessee or the name of assessee’s broker is mentioned therein. The time, as prayed for, was allowed. Thereafter, upon examining report of the Investigation Wing and the statement of Shri Raj Kumar Modi, the ld. DR fairly conceded that neither the name of the assessee nor the name of the assessee’s broker is mentioned in the report of the Investigation Wing or in the statement of Shri Raj Kumar Modi.
Both sides heard, orders of the authorities below examined. The case laws on which the ld. AR of the assessee is placed reliance considered.
The solitary issue raised by the assessee in appeal, assailing the order of CIT(A) is the addition of Rs.29,88,000/- confirmed by the CIT(A) after denying exemption of LTCG claimed by the assessee on sales of shares of M/s. PMC Fincorp Ltd.
Undisputedly, during the period relevant to the assessment year under appeal, the assessee had sold shares of M/s. PMC Fincorp Ltd. for a total consideration of Rs.29,88,000/-. The assessee claimed Long-Term Capital Gain of Rs.29,10,376/- arising from sale of the said shares as exempt in accordance with the provisions of the Act. The AO denied the exemption by treating the transaction as bogus. The assessment in the case of the assessee was reopened on the basis of the statement of Shri Raj Kumar Modi dated 11.10.2018 and the report of the Investigation Wing.
During the course of assessment proceedings, the assessee requested the AO to provide a copy of the statement of Shri Raj Kumar Modi and also sought an opportunity to cross-examine him. However, neither the statement of Shri Raj Kumar Modi was provided to the assessee nor any opportunity of cross-examination was granted. It has been contended that Shri Raj Kumar Modi has subsequently retracted from his statement. This fast has not been controverted by the Department. Thus, the statement on the basis of which the addition has been made by the Revenue in the hands of the assessee does not anymore carry evidentiary value. The assessee had also raised this issue before the CIT(A) during the first appellate proceedings. The CIT(A) while adjudicating ground no. 5 of assessee’s appeal at page no. 4 on the impugned order “records” as under:-
“Ground No. 5: Cross-Examination of Raj Kumar Modi
Appellant's Contentions: The appellant argued that the denial of cross-examination of Mr. Raj Kumar Modi violates principles of natural justice. They contended that the statement has been subsequently retracted through an affidavit and cited various Supreme Court cases including Andaman Timber Industries and the Abhimanyu Chaturvedi case to support their position.
Finding and Decision: The evidentiary value of statements recorded during search and seizure operations under section 132(4) is significantly higher than regular statements recorded in normal proceedings. The Honorable Supreme Court has consistently established that such statements, made under oath during search proceedings, carry substantial legal weight and evidentiary value. Regarding the subsequent retraction through affidavit, this does not vitiate the original statement made during the search proceedings. The retraction appears to be an afterthought designed to escape the consequences of the original admission. The original statement was made under oath with serious legal consequences for providing false information, which enhances its credibility and evidentiary value. The appellant's reliance on various case laws dealing with statements recorded in regular proceedings is misplaced, as those cases do not address the specific evidentiary value and legal sanctity of statements recorded under section 132(4) during search and seizure operations. The legal framework governing such statements is well-established and provides for higher evidentiary standards. Therefore, the cross-examination denial is upheld, and the statement retains its evidentiary value. This ground is dismissed.”
The above findings of CIT(A) are contrary to the well settled law, that the evidentiary value of retracted statement even if recorded u/s.132(4) of the Act is significantly diluted. Nevertheless, the principal of natural justice mandates that the statement on the basis of which addition is proposed to be made should be provided to the assessee. [Re. Andaman Timber Industries vs. CCE (supra)].
The assessee has furnished following documents during the assessment proceedings before the Assisting Officer:
Details of transaction
Copy of D-MAT account/transaction statement
Copy of Ledger maintained by broker
- Copy of Bank statement
- Copy of Contract notes for sale of shares
- Copy of Invoices indicating purchase of shares
- Copy of Share certificates
The assessee has sold shares through Stock Exchange and has paid STT thereon. The consideration for purchase and sale of shares is through banking channels. Once, above said documents have been furnished by the assessee and no discrepancy is found in the said documents, the assessee has discharged his onus in proving the transaction of purchase and sale of shares. The Assessing Officer has not brought on record any documentary evidence to show that the assessee or the broker of the assessee was in any manner involved in price rigging of shares of PMC Fincorp Ltd. In the above factual matrix, the transaction of purchase and sale of shares cannot be termed as bogus. Hence, the claim of exemption of LTCG on sale of shares cannot be denied to the assessee.
In the result, the addition made under section 68 of the Act is directly to be deleted, the impugned order is set aside and appeal of the assessee is allowed.