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ITO vs. Arvind Kumar Jain HUF (ITAT Mumbai)
November, 06th 2017

Bogus capital gains from penny stocks: If the DMAT account and contract note show details of the share transactions and the AO has not proved the transactions to be bogus, the capital gains earned on the said transactions cannot be treated as unaccounted income u/s 68. The fact that the broker was tainted and violated SEBI regulations would not make assessee’s transactions bogus

The AO received information from the Deputy Director of Income Tax (Inv.)-Unit-IV (4) that (i) the assessee had shown sale proceeds of shares in the scrip ‘Ramkrishna Fincap Ltd.’ as LTCG and claimed exemption, (ii) the assessee had claimed to have purchased that scrip at Rs.3.12 per share in the year 2003 and sold the same at Rs.165.83 per share in the year 2005, (iii) those scrips were penny-stock and the capital gain declared was only accommodation entries, (iv) the broker M/s Basant Periwal & Co. through whom the transactions were effected had appeared as ‘DRI probing evasion by firms via jama kharchi’, who indulged in market manipulation and price manipulation through synchronized and cross deal in scrip of Ramkrishna Fincap Ltd., (v) SEBI had passed an order dated 09.07.2009 regarding the irregularities and synchronized trades carried out in the scrip of Ramkrishna Fincap Ltd. by the broker M/s Basant Periwal & Co. In view of the above, the AO reopened the assessment by issuing notice u/s 148. After going through the submission of the assessee, the AO held that the scrip of Ramkrishna Fincap Ltd. is nothing but a penny stock. The assessee had done transactions with M/s Basant Periwal & Co. in only one transaction i.e. ‘Ramkrishna Fincap Ltd.’, that too in the particular period for which SEBI had given a specific finding. Considering the above facts, the AO brought to tax the LTCG of Rs.44,24,385/- shown by the assessee as unexplained cash credit u/s 68. This was deleted by the CIT(A). On appeal by the department to the Tribunal HELD dismissing the appeal:

(i) The AO has treated the share transaction as bogus on the plea that SEBI has initiated investigation in respect of Ramkrishna Fincap Pvt. Ltd. The AO further stated that investigation revealed that transaction through M/s Periwal and Co. on the floor of stock exchange was more than 83%. We found that as far as initiation of investigation of broker is concerned, the assessee is no way concerned with the activity of the broker. Detailed finding has been recorded by CIT(A) to the effect that assessee has made investment in shares which was purchased on the floor of stock exchange and not from M/s Basant Periwal and Co. Against purchases payment has been made by account payee cheque, delivery of shares were taken, contract of sale was also complete as per the Contract Act, therefore, the assessee is not concerned with any way of the broker. Nowhere the AO has alleged that the transaction by the assessee with these particular broker or share was bogus, merely because the investigation was done by SEBI against broker or his activity, assessee cannot be said to have entered into ingenuine transaction, insofar as assessee is not concerned with the activity of the broker and have no control over the same. We found that M/s Basant Periwal and Co. never stated any of the authority that transaction in M/s Ramkrishna Fincap Pvt. Ltd. on the floor of the stock exchange are ingenuine or mere accommodation entries. The CIT(A) after relying on the various decision of the coordinate bench, wherein on similar facts and circumstances, issue was decided in favour of the assessee, came to the conclusion that transaction entered by the assessee was genuine. Detailed finding recorded by CIT(A) at para 3 to 5 has not been controverted by the department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT(A). Moreover, issue is also covered by the decision of jurisdictional High Court in the case of Shyam R. Pawar (supra), wherein under similar facts and circumstances, transactions in shares were held to be genuine and addition made by AO was deleted. Respectfully following the same vis-à-vis findings recorded by CIT(A) which are as per material on record, we do not find any reason to interfere in the order of CIT(A). (ITO vs. M/s Indravadan Jain HUF (ITA No. 4861/Mum/2014) followed)

(ii) In CIT vs. Shyam R. Pawar (2015) 54 108 (Bom.), it has been held by the Hon’ble Bombay High Court that where DMAT account and contract note showed details of share transaction, and Assessing Officer had not proved said transaction as bogus, capital gain earned on said transaction could not be treated as unaccounted income u/s 68.

(iii) In the case of CIT vs. Arun Kumar Agarwal (HUF) (2012) 26 113 (Jharkhand), the Hon’ble Jharkhand High Court has held that where assessee’s broker share transaction was bone fide in all respect, merely because share broker was tainted violating SEBI regulations, would not make assessee’s share transactions bogus.

(iv) The ratio of the above decisions is applicable to the instant case.

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