Sale of shares cannot be treated as sham in absence of any involvement of taxpayer in price rigging

While dismissing the Department’s appeal, the Ahmedabad Income Tax Appellate Tribunal deleted the addition on account of bogus capital gain by the shares of a penny stock company in the absence of material on record.  

A Division Judge Bench of Judicial Member Siddhartha Nautiyal and Accountant Member Waseem Ahmed observed that “no material has been brought on record to suggest that Assessee was involved in any price rigging and not has the case of Assessee mentioned in the list of beneficiaries, by the persons whose statements were recorded. In the statements recorded, the name of the Assessee as a beneficiary was not specifically mentioned.”

“Despite the Assessee’s specific request, no opportunity of cross-examination was provided to the Assessee on the basis of whose statements reliance has been placed to hold that the sale of shares was sham/bogus”, added the Bench. 

Advocate S. N. Soparkar appeared for the Petitioner whereas Advocate Darsi Suman Ratnam appeared for the Respondent. 

The brief facts of the case were that the Assessee is an individual engaged in the activity of investment in and sale of shares and mutual funds, portfolio management schemes, and dealing in futures and options. During the year under consideration, the Assessee submitted his return of income. The case of the Assessee was selected for scrutiny and a survey under Section 133A was conducted on the group cases of the Assessee. The Assessing Officer observed that the Assessee had sold shares of M/s Asianlak Capital and Finance Ltd which was later changed to M/s Global Infratech Finance Ltd. The Assessing Officer was of the view that M/s Global Infratech Finance Ltd. was involved in providing bogus long-term capital gain entries through listed penny stocks on the Bombay Stock Exchange. Accordingly, the Assessing Officer added a sum of Rs. 9,44,73,250/- to the total income of the Assessee as bogus long-term capital gains.

The Assessee raised an appeal where the Commissioner of Income Tax (CIT) allowed the appeal and passed an order in favor of the Assessee. Here, the department is in an appeal against the order passed by CIT. 

After considering the Submission, Bench noted that the company M/s Global Infratech and Finance Ltd. had no financial standing as it is a penny stock company. As well as the Assessee is an experienced investor who has been investing in shares of various companies.

The Bench stated that the Assessee being an experienced investor has given no justifiable explanation as to why he would invest in / purchase as many as 1,75,000 shares of a little-known company having no financial standing and no sound business fundamentals.

The Bench also pointed out that the department has brought nothing on record to prove that the Assessee was involved in price rigging of the instant share or that any form of cash had flown back to the Assessee, so as to create the instant gains made by the Assessee as bogus long-term capital gains.

The Bench also highlighted the fact that the Assessee was not provided any opportunity for cross-examination, under the light of the case Andaman Timber Industries62 taxmann.com 3 (SC), while reiterated that “when statements of witnesses are made the basis of demand, not allowing the assessee to cross-examine witnesses is a serious flaw which makes order nullity, as it amounts to a violation of principles of natural justice.”

Hence, relying on the Judgment passed by the Hon’ble Supreme Court in the case of Renu Aggarwal, the Bench dismissed the appeal of the Department. 

Cause Title: Deputy Commissioner of Income Tax Vs. Rajnikant Prabhudas Mandavia [ITA Nos. 401&402/Ahd/2019 / 2023-Enterslice-39-ITAT-Ahd]

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Deputy-Commissioner-of-Income-Tax-Versus-Shri-Rajnikant-Prabhudas-Mandavia