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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 ..... assessee is an individual, filed his return of income for AY 2014-15 on 27.09.2014 declaring a total income of Rs. 6,88,071/-, including LTCG of Rs. 1,04,97,687/- on the sale of shares of LHSL, which was claimed as exempt under section 10(38) of the Act. The return was processed under section 143(1) of the Act. Subsequently, the assessment was reopened under Section 147 based on information received from the Investigation Wing of the Income Tax Department, which indicated that LHSL was a penny stock and that the assessee was a beneficiary of a bogus LTCG scheme. The assessee was not furnished with the full text of the reasons recorded for reopening, and only a gist of the reasons was provided with the notice dated 08.02.2022, thereby preventing the assessee from fully and properly filing objections. The AO issued multiple notices under Sections 142(1) and 143(2) of the Act, and the assessee submitted responses along with bank statements, demat account details, purchase and sale invoices, and allotment letters. However, the AO did not accept the submissions and concluded that the transactions were not genuine. The AO disallowed the LTCG claim and made an addition of Rs. 1,07,92,400/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing upon the DDIT information and report. The CIT(A) had also failed to furnish the copy of material collected by DDIT and not allowing the opportunity of cross examination of concerned parties. Therefore, there was gross violation of principles of natural justice and such order is liable to be quashed. 2.1 The Ld. CIT(A) has grievously erred in law and or on facts in upholding the validity of the proceedings u/s. 147 of the Act. Since the condition precedent for valid reopening u/s. 147 were not satisfied, the impugned notice u/s. 148 is wholly illegal and unlawful. The appellant had raised detailed objection in reply given 14/02/2022 which were not disposed off. Therefore, the impugned assessment is liable to be quashed. 3.1 The Ld. CIT(A) has grievously erred in law and or on facts in upholding the shares of Looks Health Services Ltd as penny scrip and LTCG on sale thereof as bogus and thereby making addition of Rs. 1,07,92,400/-u/s. 68. 3.2 That in the facts and circumstances of the case as well as in law, the Id. CIT(A) has grievously erred in upholding the shares of Looks Health Services Ltd as penny scrip and LTCG on sale thereof as bogus and thereby making addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05 (on 11-01-2022), reflecting a rise of 16,169.44% in just 22 months. Further, the assessee emphasized that there was no cash involvement in these transactions, as all payments were made through banking channels using account payee cheques and RTGS. Since there was no cash transaction, the allegation of accommodation entry had no basis. The assessee also stated, in the reply to show cause notice, that addition could not be made merely on suspicion, assumptions, or without tangible evidence. The assessee had furnished all necessary documents, including bank statements, allotment letters, demat account details, and sales invoices. Since these documents were not disputed by the AO, there was no valid basis to invoke Section 68 of the Act. 6.2. The AR also pointed out from the order of AO that the AO has not taken into consideration very important financial parameters like Net Worth and EPS of the Company. The AR also pointed out that the increase in the following financial parameters of the Company as given in the order of AO which can be termed as Turnaround - Particulars March 2012 March 2016 Net worth (Rs. Cr) 3.07 14.53 Book Value (Rs.) 9.30 13.83 EPS (Rs.) -4.97 0.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fluctuations. - The price of LHSL shares increased exponentially in a short span without any corresponding financial growth in the company. - The assessee's transactions were part of a larger scheme designed to create artificial LTCG claims to evade tax. 8.3. The CIT(A) upheld the addition, primarily relying on judicial precedents dealing with penny stock transactions and holding that the investment in LHSL shares was a make-believe transaction intended to launder unaccounted money. 8.4. We note that the assessee has furnished substantial documentary evidence in support of the transactions, including bank statements, demat account statements, share allotment letters, and sale invoices. The transactions were executed through recognized stock exchanges, and payments were made via banking channels. The AO has not disputed the authenticity of these documents nor produced any direct evidence to show that the transactions were manipulated or prearranged. The CIT(A), while upholding the addition, has relied on judicial precedents emphasizing the principle of human probabilities and preponderance of probabilities in tax matters. The DR, during the course of hearing, also agreed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edents where similar additions were deleted by various ITATs and High Courts. In the case of Varun Nagjibhai Patel Vs. DCIT, ITAT Ahmedabad - ITA No. 417/Ahd/2019, the Co-ordinate Bench held that merely relying on Investigation Wing reports without conducting an independent inquiry was not a valid ground to make an addition under Section 68. The ruling emphasized that if the assessee furnishes valid documentation, the burden shifts to the department to disprove the claim, which was not discharged in this case. This decision directly supports the assessee's case, as the AO has failed to provide independent evidence to rebut the transaction. 8.8. Similarly, in Rakesh Ramanlal Shah Vs. DCIT, Gujarat High Court - Special Civil Application No. 4840 of 2022, the Hon'ble Gujarat High Court ruled that if shares were acquired through legitimate preferential allotment and later sold through recognized exchanges with Securities Transaction Tax (STT) paid, the gains could not be treated as bogus. This judgment applies directly to the present case since the shares were allotted directly by the company and subsequently traded through stock exchanges, reinforcing the assessee's claim of a genuin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions with any price manipulation or accommodation entry provider. The DR has also admitted that the CIT(A)'s conclusion was not supported by any material evidence. Unlike Swati Bajaj, where the investigation traced cash deposits leading to share purchase, in the present case, all transactions were done through banking channels via account payee cheques and RTGS, and there was no cash involvement. In Swati Bajaj, shares were typically purchased through off-market transactions and then sold after price inflation. In contrast, the assessee in the present case acquired shares through direct preferential allotment from the company itself, which had a lock-in period as per SEBI regulations. This negates the possibility of price manipulation through circular trading in the initial acquisition. In Swati Bajaj, the shares were traded in a manner that followed a "bell curve" pattern, where prices were artificially rigged before being offloaded at a peak. In the present case, the assessee's transactions took place through the recognized stock exchange, with STT paid, and there is no evidence that the prices were manipulated before sale. The AR has pointed out that Looks Health Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... listed and traded, any investor or trader - whether a regular market participant or a one-time investor- is free to take advantage of price movements and seek potential profits. Price volatility in shares can arise due to various market forces, including speculative trading, demand supply dynamics, market sentiments and external economic factors. The mere fact that a share has witnessed unusual price movements does not automatically lead to the conclusion that all transactions in that share are sham or that an assessee's trading activities lack genuineness. However, in cases where there is an allegation of share price manipulation, the AO must conduct a detailed investigation to establish whether the assessee was merely an investor availing market opportunities or an active participant in a scheme of manipulation designed to launder unaccounted income. The investigation must go beyond analyzing share price patterns and financial statements of the concerned company and should establish a direct link between the assessee's transactions and an alleged larger scheme of price rigging. If the revenue seeks to treat a transaction bogus, it must be supported by concrete evidence that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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