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Pankaj Agarwal & Sons (HUF) vs. ITO (ITAT Chennai)
February, 04th 2019

Bogus Capital Gains From Penny Stocks: Plea that opportunity to cross-examine the witness was not given & investigation report was not furnished is not relevant if assessee unable to successfully controvert findings of the AO and such argument was never made before the lower authorities

These appeals by the assessees are directed against the orders
passed by the learned Commissioner of Income Tax (Appeals)-12,
Chennai as detailed herein below for the assessment year 2014-15
passed U/s.250(6) r.w.s.143(3) of the Act :-
4 ITA Nos. 1413 to 1420/Chny/2018
Since the issues in all these appeals are identical, they have
been taken up for hearing together and disposed off by this common
2. The assessees have raised several identical grounds in their
appeals however the following grounds were argued before us at the
time of hearing:-
(i) The Ld.CIT(A) has erred in confirming the addition made by the
Ld.AO U/s.68 of the Act, by rejecting the assessees claim of
exemption U/s.10(38) of the Act on the Long Term Capital Gains
earned out of the purchase & sale of equity shares of the
company M/s. SRK Industries Ltd., by holding that the

Appeal No.


Order of the Ld.CIT(A)-12, Chennai






ITA 1413 of 2018

M/s. Pankaj Agarwal
& Sons (HUF)

ITA No.192/CIT(A)-


ITA 1414 of 2018

Smt. Mamta Agarwal

ITA No.185/CIT(A)-


ITA 1415 of 2018

M/s. Rajnish Agarwal
& Sons (HUF)

ITA No.191/CIT(A)-


ITA 1416 of 2018

Shri Ramkishan

ITA No.194/CIT(A)-


ITA 1417 of 2018

M/s. R. K. Agarwal &
Sons (HUF)

ITA No.190/CIT(A)-


ITA 1418 of 2018

Smt Sampatti Agarwal

ITA No.187/CIT(A)-


ITA 1419 of 2018

Shri Rajnish Agarwal

ITA No.184/CIT(A)-


ITA 1420 of 2018

Shri Pankaj Kumar

ITA No.188/CIT(A)-


5 ITA Nos. 1413 to 1420/Chny/2018
transactions are sham and tailored to bring the unaccounted
money as the legitimate gain in the guise of Long Term Capital
Gain which is exempt U/s.10(38) of the Act.
(ii) In the case of Shri Ramkishan Agarwal in ITA
No.1416/Chny/2018 the assessee has raised the ground that
the Ld.AO had erroneously adopted the total income as
Rs.5,95,016/- as against Rs.5,25,690/- declared by the
assessee in the return of income while computing the income of
the assessee.

(iii) The Ld.AO had erroneously computed the aggregate value of
the sale of shares of M/s. SRK Industries Ltd., as follows while
computing the Long Term Capital Gain:
(iv) In the case of Rajnish Agarwal in ITA No.1419/Chny/2018 the
assessee has raised the ground that the Ld.CIT(A) has erred in
confirming the order of the Ld.AO who had not allowed the

Assessee /
Appeal No.

Actual value of
the shares sold

Erroneous value
adopted by the Ld.AO

Smt. Sampati Agarwal
ITA No.1418/Chny/2018



Shri Rajnish Agarwal
ITA No.1419/Chny/2018



Shri Pankaj Agarwal
ITA No.1420/Chny/2018



6 ITA Nos. 1413 to 1420/Chny/2018
benefit of set-off of losses on the sale of shares amounting to
Rs.6,01,730/- while computing the total income.
(v) The assessees object to the levy of interest U/s.234B & 234C of
the Act.
3. The brief facts in all these appeals are that the assessees
cases were selected for scrutiny and orders were passed U/s.143(3) of
the Act on 29.12.2016, wherein the Ld.AO treated the purchase and
sale of shares of M/s. SRK Industries Ltd., as sham transaction and
thereby the claim of exemption U/s.10(38) of the Act, with respect to the
Long Term Capital Gain earned by the assessees on those transactions
were denied and the same was treated as unexplained cash credit
U/s.68 of the Act.
4. While doing so, the Ld.AO analyzing the issue in detail arrived at the
conclusion that the following findings of the wing corroborates with the
findings of the SEBI:-
(i) The company in which the assessees had purchased the equity
shares had no creditability and no prudent investor would make
such investment.
7 ITA Nos. 1413 to 1420/Chny/2018
(ii) As per the finding of the investigation report of the investigation
wing, the members who participated in the trading of the scrip
during mid-2013 to mid-2014 were part of the syndicate of
brokers and brokering entities indulging in price rigging.
(iii) The ultimate beneficiary of all the price manipulation is the
beneficiaries like the assessees who sold the shares when the
share price was sufficiently brought to a high level and could
take the benefit of Section 10(38) of the Act.
(iv) For facilitating such bogus entries, the brokers were paid
commission in cash generally around 6% of the value of the
transaction or Rs.0.50 to Rs.1/- for every Rs.100/- transacted.
(v) But for the price rigging and manipulative actions of the brokers
the assessee would not have earned such Long Term Capital
(vi) The motive of the price manipulation is only to bring out their
black money as legitimately earned Long Term Capital Gain for
which exemption U/s.10(38) of the Act is available.
5. The Ld.AO further relied on the following decisions while
deciding the cases against the assessees:-
8 ITA Nos. 1413 to 1420/Chny/2018
(i) The Hon’ble Apex Court in the case Sumathi Dayal reported in
214 ITR 801, it was held that “In our opinion, the majority opinion
after considering surrounding circumstances and applying the test of
human probabilities has rightly concluded that the appellant’s claim
about the amount being her winning from races is not genuine. It
cannot be said that the explanation offered by the appellant in respect
of the said amounts has been rejected unreasonably and that the
finding that the said amounts are income of the appellant from other
sources is based on evidence
(ii) The Hon’ble Apex Court in the case M/s. Durga Prasad More
reported in 82 ITR 540, it was held that “Science has not yet
invented any instrument to test the reliability of the evidence placed
before a Court or Tribunal, Therefore the Courts and Tribunals have
to judge the evidence before them by applying the test of human
(iii) In the Landmark McDowell Vs. CTO case, the Hon’ble Apex
Court had held “Colourable devices cannot be part of tax planning
and it is wrong to encourage or entertain the belief that it is
honourable to avoid the payment of tax by resorting to dubious
methods. It is the obligation of every citizen to pay the taxes honestly
without resorting to subterfuges.

9 ITA Nos. 1413 to 1420/Chny/2018
6. On appeal the Ld.CIT(A) confirmed the order of the Ld.AO
after detailed deliberations.
7. Before us the Ld.AR submitted that the assessees were not provided
with an opportunity to cross-examine the witness who were relied by the
Revenue and further failed to furnish the investigation report of the
intelligence wing of the Revenue before concluding the assessment.
The Ld.AR further argued that the assessees were not provided with
proper opportunity of being heard. It was therefore pleaded that the
matter may be remitted back to the file of Ld.AO for fresh consideration.
The Ld.DR strongly opposed to the submission of the Ld.AR and
requested for confirming the orders of the Ld.Revenue Authorities.
8. We have heard the rival submissions and carefully perused
the materials on record. At the outset we must say that the Ld.AR could
not justify before us any of their claims made before the Ld.Revenue
Authorities that the transaction was genuine. Further the Ld.AR could
not successfully controvert to any of the findings of the Ld.Revenue
Authorities before us which are against the assessees. Instead the
Ld.AR has only come out with the plea that the assessees were not
provided with opportunity of cross-examining the witness, the
10 ITA Nos. 1413 to 1420/Chny/2018

investigation report was not furnished and proper opportunity was not
provided of being heard. However we find that all these arguments
raised by the Ld.AR before us was never alleged before the
Ld.Revenue Authorities when the matter was before them. In this
situation we do not have any other option but to confirm the orders of
the Ld.Revenue Authorities in the case of all the assessees because
the Ld.AO as well as the Ld.CIT(A) have arrived at their respective
decisions after considering the issues in the appeal in detail and there is
nothing before us to disturb their findings. Accordingly we hereby
confirm the Order of the Ld.Revenue Authorities on this issue. Thus the
first ground raised by the assessees herein above in all the appeals are
held against the assessees.
9. With respect to the Ground No. 2(ii) & 2(iii) raised by the
assessees in the respective appeals, we find that the issue is with
respect to computation of total income from the basic facts of those
cases and therefore we hereby remit back the matter to the file of
Ld.AO to verify the claim of the assessees and thereafter decide the
matter in accordance with law and merit.
11 ITA Nos. 1413 to 1420/Chny/2018
10. In the Ground No. 2(iv), the assessee has raised the issue that
the Ld.AO has denied the benefit of set-off losses. Since we do not find
any detailed discussion on the issue by the Ld.AO as well as the
Ld.CIT(A), we remit back the matter to the file of Ld.AO for fresh
11. Levy of interest U/s.243B and 243C of the Act is consequential
in nature and therefore this ground raised by the assessees is devoid of
12. In the result the appeals of the assessees in ITA Nos.1416,
1418,1419 & 1420/Chny/2018 are partly allowed and the appeals of the
assessees ITA Nos.1413, 1414, 1415 & 1417/Chny/2018 are


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