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TMI Blog2025 (2) TMI 1078X X X X Extracts X X X X X X X X Extracts X X X X ..... l realization of sale proceeds, was a façade used to introduce unaccounted income. It is settled principle of law that the primary onus lies on the assessee to substantiate the genuineness of the transaction by furnishing documentary evidence. If the fundamental aspects are satisfied, the burden then shifts to the revenue to bring on record specific material evidence proving that the transactions were merely a colourable device aimed at tax evasion. The mere fact that a share has been subject to price manipulation does not automatically lead to addition under section 68 of the act unless it is conclusively demonstrated that the assessee was part of the scheme, and the transactions were structured to generate artificial gains or losses. In the present case such detailed investigation by AO is absent. Assessee's grounds challenging the addition u/s 68 on account of bogus LTCG and penny stock transactions allowed. Treating the entire sale consideration as undisclosed income without allowing the purchase cost - We find merit in the assessee's contention. Even if the transaction was to be doubted, the entire sale consideration cannot be taxed as undisclosed income. Taxing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and made an addition of Rs. 1,07,92,400/- under Section 68 on the grounds that LHSL was identified as a penny stock with no significant financial activity and weak fundamentals, Abnormal share price movement, with a sharp rise and fall without any corresponding business growth, Investigation Wing's report indicated price manipulation and circular trading, Assessee could not explain why he invested in LHSL, a company with no business operations, Absence of due diligence before investment. The AO Denied cross-examination request, stating that the Investigation Wing's report was sufficient evidence. 3. The assessee filed an appeal before CIT(A) challenging the reopening under section 147 and addition under section 68 of the Act. The CIT(A) upheld the reopening, holding that the AO had valid reasons to believe that income had escaped assessment. The CIT(A) also upheld the addition under Section 68 of the Act, concluding that the assessee failed to justify his investment in a company with no business operations, the assessee was aware of price rigging as he purchased shares through preferential allotment, the price spike was unnatural, indicating manipulation. The CIT(A) relied on jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f as bogus and thereby making addition of Rs. 1,07,92,400/-u/s.68. 3.3 The observations made and conclusions reached by CIT(A) to uphold scrip of LHSL as penny stock are not admitted by the appellant and the same should be rejected in toto on account of the same being irrelevant and general in nature. 4.1 Without prejudice to above and in the alternative, the Ld. CIT(A) has erred in confirming addition of entire sale price as undisclosed income though the purchase price of Rs. 250000/- was paid by cheque from regular bank a/c. It is therefore prayed that the addition of Rs. 1,07,92,400/-/- u/s 68 of Act confirmed by the CIT(A) should be deleted. 5. During the course of hearing before us, the Authorized Representative (AR) of the assessee preferred not to press for the grounds challenging the reopening and cross examination. The AR stated that the shares were allotted by the company itself and not purchased off-market. Since the allotment was direct from the company, there was no question of any manipulative transaction or accommodation entry. The AR also stated that the shares were subject to a lock-in period as per the terms of preferential allotment. The AR further stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs.) 9.30 13.83 EPS (Rs.) -4.97 0.08 6.3. The AR further stated that such turnaround may also be a reason to believe that the share of the company may perform good in the stock market. The AR also placed reliance on the following judicial precedents where the relief was given to assessee in case of capital gains on account of sale of shares of Look Health Services Ltd. : 1. Varun Nagjibhai Patel Vs. DCIT, Circle 3(3), Ahmedabad - ITA No. 41/Ahd/2019. 2. Ashokbhai Shankerlal Shah Vs. ITO Ward 1(2)(1), Ahmedabad - ITA No.1262/Ahd/2024. 3. ITO 1(1)(1), Mumbai Vs. Sohni Dipak Tanna - ITA No. 2245/MUM/2022. 4. Jayantilal Panachan Shah Vs. The PCIT-1, Ahmedabad - ITA No.627/Ahd/2024. 5. Rakesh Ramanlal Shah Vs. DCIT Circle 2(1)(1), Ahmedabad - Special Civil Application No. 4840 of 2022. 7. The Departmental Representative (DR), on the other hand, relied on the order of CIT(A) and stated that the CIT(A) in his order has distinguished the decision of Varun Nagijibhai Patel. The DR also pointed out that the assessee has dealt with only this share and very few shares of other companies which shows that the assessee is not a regular investor and has taken benefit the bogus sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of hearing, also agreed that CIT(A)'s conclusion that - "the assessee's investment in the shares of M/S Looks Health Services Ltd. is only a make believe transaction intended to bring back his black money into his books in a circular route through manipulation of prices of penny stock" - was not supported by evidence. This admission significantly weakens the revenue's case, as it highlights that the addition made by the AO and upheld by CIT(A) was based solely on suspicion and general assumptions rather than on concrete material evidence. 8.5. The primary contention of the assessee is that the shares were acquired through preferential allotment from the company itself and not through off market transactions, thereby ruling out the possibility of price rigging by the assessee. The shares were subject to a mandatory lock-in period, further reinforcing the claim that the transaction was genuine. The assessee has demonstrated that all payments were made through banking channels, thereby eliminating any possibility of cash involvement or accommodation entries. Many courts have categorically held that once an assessee furnishes documentary proof, the burden shifts to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nforcing the assessee's claim of a genuine transaction. 8.9. In the case of Jayantilal Panachan Shah Vs. PCIT, ITAT Ahmedabad - ITA No. 627/Ahd/2024, the Co-ordinate Bench held that stock price movements alone could not be a ground to hold transactions as accommodation entries. The department was required to establish a direct nexus between the assessee and the alleged price manipulation, which was absent in this case. This decision is directly applicable to the present case, as the AO has not shown any link between the assessee and any alleged price rigging or artificial trading activity. 8.10. Further, in the case of Sohni Dipak Tanna Vs. ITO, ITAT Mumbai - ITA No. 2245/MUM/2022, the Tribunal held that merely because a stock is flagged as a penny stock does not automatically render every transaction in that stock non-genuine. The AO must establish that the assessee was involved in the price rigging scheme, which was not proven in the case at hand. This precedent further strengthens the assessee's position, as the AO has failed to provide any substantive evidence linking the assessee to any artificial price manipulation or accommodation entry. 8.11. The CIT(A), while upholding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pointed out that Looks Health Services Ltd. (LHSL) was not merely a paper company; instead, its financials showed significant growth in net worth and EPS over the relevant period. The financial turnaround was ignored by the AO and CIT(A), whereas in Swati Bajaj, the companies involved had no genuine business activity. In Swati Bajaj, the AO relied on detailed statements from entry operators, brokers, and promoters, confirming the manipulation of stock prices. In contrast, in the present case, the assessee was not provided with the investigation report or given an opportunity for cross-examination of any such statements, violating principles of natural justice. 8.12. The CIT(A) attempted to distinguish the case of Varun Nagjibhai Patel (supra) from the present case by arguing that the decision in Varun Patel was rendered in a case where the AO had not conducted a proper inquiry. The CIT(A) contended that in the present case, the AO had conducted sufficient inquiries and relied on the findings of the Investigation Wing. This distinction is incorrect as in Varun Nagjibhai Patel, the co-ordinate bench deleted the addition under Section 68, holding that merely relying on the Investig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported by concrete evidence that the purchase or sale of share was a sham. This would require proving that the transaction lacked actual transfer of ownership, that the contract notes, Demat entries were mere paper transactions, or that the corresponding money flow was circular in nature, involving accommodation entries. Additionally, if the sale or purchase is alleged to be non-genuine, the revenue must demonstrate that the entire money trail, from the purchase to the final realization of sale proceeds, was a façade used to introduce unaccounted income. It is settled principle of law that the primary onus lies on the assessee to substantiate the genuineness of the transaction by furnishing documentary evidence. If the fundamental aspects are satisfied, the burden then shifts to the revenue to bring on record specific material evidence proving that the transactions were merely a colourable device aimed at tax evasion. The mere fact that a share has been subject to price manipulation does not automatically lead to addition under section 68 of the act unless it is conclusively demonstrated that the assessee was part of the scheme, and the transactions were structured to gen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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