Farzad Sheriar Jehani v. ITO

Case snapshot

Sections / provisions: 10(38); 68; 69C

Questions before the Court / Tribunal

• Penny-stock LTCG; investor nexus to manipulation: The reported decision concerns a penny-stock allegation and focuses on whether evidence connected the particular investor to price rigging or an accommodation-entry network. It reports deletion where that nexus was absent.

Material facts and background

Brief facts of the case are, assessee filed its return of income on

31.03.2015 declaring taxable income of ₹.13,49,630/- and the return of income was processed under section 143(1) of Income-tax Act, 1961 (in short “Act”). Subsequently, the case was selected for scrutiny under CASS and notices under section 143(2) and 142(1) of the Act were issued and served on the assessee along with questionnaire.

response, Authorised Representative of the assessee attended and submitted the relevant information as called for.

The assessee is an individual and partner in three (3) firms namely

Leopold Café & Stores, New York Café, Leos Boulangerie and assessee has derived incomes under the head Salary, Income from Partnership firm, Capital Gains, Other Sources and Agricultural income. During the course of assessment proceedings, Assessing Officer observed that assessee has claimed exempt income of ₹.82,52,616/- on account of Long Term Capital Gain on payment of STT under section 10(38) of the Act. Based on the information available on record, he observed that assessee has sold 7550 shares of Penny Stock "Kappac Pharma" (suspected scrip) during the current assessment year. The sale value of entire Shares was of ₹.52,27,792/- and assessee had purchased the shares of Parixit Gas Company Ltd. in physical form on 09.10.2012 for

ITA NO. 2065/MUM/2023 (A.Y. 2014-15) Farzad Sheriar Jehani

₹.83,050/- and demated the same on 10.01.2013 with Balance Equity Broking (India) Private Limited. The assessing officer has observed that Assessee has declared huge profit in this scrip, hence, he is of the opinion that all these transactions are pre-arranged.

Appellant / assessee submissions

the case of Uttamchand Jain [2009] 182 taxman 243 dated 02.07.2009 Principal CIT Hitesh Gandhi in ITA No. 18/2017, dated 16-2-2017 (Punj.&Har.); The Tribunal upheld the findings recorded by the CIT(A). It was categorically recorded by the Tribunal that as noticed by the CIT(A), in the remand report the Assessing Officer was not able to contradict the facts regarding purchase of shares and sale thereof. Further, it was recorded that the assessee had sold shares through MTL shares and Stock Broker limited which is a SEBI registered Stock Broker. The payment for sale of shares was received through banking channels. All the documentary evidence being in favour of assessee, the deletion of the addition made by the CIT(A) was upheld by the Tribunal. The findings recorded by the CIT (A) and the Tribunal are pure findings of fact which have not be shown to be illegal, erroneous perverse by the learned counsel for the appellant. He has also not been able to produce any material on record to controvert the said findings. Thus, no Substantial question of law arises. Consequently, finding no merit in the appest by Revenue and the same la dismissed. Dipesh Ramesh Vardhan vs. DCIT (ITAT Mumbai)...

11. At the time of hearing, Ld.AR of the assessee submitted that assessee has transferred 7550 shares of KPL and earned Long Term Capital Gain exemption under section 10(38) of the Act. Further, he submitted that assessee has submitted various documentary evidences in support of the above said transaction and he brought to our notice contract notes of sales of shares [Page No. 43 to 49 of the Paper Book], details of cheque issued by stock broker of the assessee towards sales [Page Nos. 50 to 60 of the Paper Book], bank statements in support of the realisation of the sale proceeds and he submitted that the Long Term Capital Gain earned by the assessee is genuine and not an arranged one as alleged by the tax authorities.

Revenue / respondent submissions

14. On the other hand, Ld. DR relied on the order of the lower authorities. Further, Ld. DR submitted as under: a. The Department has not accepted the purchase of the shares as genuine. b. The company, M/s Kappac Pharma Limited ("KPL"), was a loss making company and did not report any sales. The price chart of the scrip shows a bell curve which was typical of a 'penny stock'. C. That KPL was a 'penny stock' and there were illegal dealings in it was a proven fact. Therefore, the Appellant cannot be treated as an innocent investor. The fact that Appellant has dealt in this penny stock and has purchased the shares in cash is sufficient to treat the long term capital gains as bogus on the basis of preponderance of probabilities.

15. In the rejoinder, Ld.AR of the assessee raised objections to the submissions of the Ld. DR.

submissions, for the sake of clarity it is reproduced below: “4. Rejoinder to argument in para 3(a) above - The oral submissions go beyond the findings of the AO in para 4 and para 8.1(a) of the assessment order itself. The AO has not doubted the purchase at all. A transaction cannot be considered as doubted on the basis of generalized assumptions and statements unless the AO categorically and unequivocally rejects/ doubts the same. Hence, the learned Departmental Representative cannot contend that the purchase itself is doubted by the AO. It is settled position of law that departmental representative cannot make out a new case which is not the case of the assessing officer also. The Appellant relies on the Third Member decision of the Tribunal in the case of ACIT v. Ms. Aishwarya K. Rai [2010] 127 ITD 204 (Mum.) which held as follows: "4. It is no doubt true that the learned D.R. can make any arguments in support of the stand taken by the Assessing Officer but there are certain inherent limits of his arguments inasmuch as he cannot transgress the boundaries made by the Assessing Officer. In other words, the learned D. R. can support the action of the Assessing Officer with any...

Court / Tribunal analysis and reasoning

account of any alleged price rigging by certain persons, such price would be available to every owner of shares including the Appellant for selling without being aware of the price rigging. b. The Appellant was not party to the alleged price rigging. Neither SEBI nor any other authority has made any allegation against the Appellant. Even the investigation carried out by the Directorate of Investigation, Kolkata has not found any material showing the involvement of the Appellant. There is no material to suggest that the Appellant converted his unaccounted cash into long term capital gains. c. The Appellant was an innocent risk-taking investor who purchased shares with a view to make gains. The decision to sell the shares was taken in order to book the extraordinary gains. d. The fact that even in a case there is rigging in the price of the shares by certain individuals, there would always be certain innocent investors who sell the shares upon witnessing huge rise in prices without being party to the price rigging, was also acknowledged by the coordinate bench of this Tribunal in the case of Manish Kumar Baid v. ACIT (ITA No. 1236-37/Kol/2017, dated 18th August 2017). Another...

*The assessee has not been able to prove the unusual rise and fall of share prices to be natural and based on the market forces. It is evident that

Correct position further question questions were asked by the AO in this regard. There was not even a single question which the Appellant failed to answer. The AO did not point out any question which the Appellant has failed to answer properly. The statement of the Appellant was recorded and a perusal of the said statement would reveal the same. Despite repeated requests during the scrutiny proceedings, the AO has failed to hand over a copy of the said statement to the Appellant

case contended that she purchased the shares from the Managing Director of this company and the ITAT found discrepancies in the version of the assessee regarding the purchase of the shares (Para 6). Whereas in the present case, no discrepancy is found in the purchase of the shares by the Appellant and the same has been admitted by the AO. b. Poonam Gupta (ITAT Bangalore) (pg. 149 to 151 of paperbook) - The assessee did not appear before the ITAT. The ITAT decided this matter in the absence of the assessee since there was no material to controvert the findings given by the CIT (A). There is no ratio laid down in this judgement (Para 4) and it cannot be treated as a precedent. c. Suman Poddar (SC) (pg. 152 to 159 of paperbook) At the outset, it needs to be noted that the Supreme Court has merely dismissed the SLP against the judgement of the Delhi High Court. Thus, it cannot be said that the SC has laid down any ratio in its order. The scrip which was traded in this case was identified by the Bombay Stock Exchange as a penny stock being used for bogus long term capital gains (Para 8). This material fact is completely absent in the present case. Furthermore, in this case, the Delhi...

14. On the other hand, Ld. DR relied on the order of the lower authorities. Further, Ld. DR submitted as under: a. The Department has not accepted the purchase of the shares as genuine. b. The company, M/s Kappac Pharma Limited ("KPL"), was a loss making company and did not report any sales. The price chart of the scrip shows a bell curve which was typical of a 'penny stock'. C. That KPL was a 'penny stock' and there were illegal dealings in it was a proven fact. Therefore, the Appellant cannot be treated as an innocent investor. The fact that Appellant has dealt in this penny stock and has purchased the shares in cash is sufficient to treat the long term capital gains as bogus on the basis of preponderance of probabilities.

to disallow the claim of the long term capital gains made by assessee’s, rejected the Department's stand and interpretation of investigation carried out by its investigation wing. Therefore, the Appellant respectfully submits that each case ought to be viewed in light of the peculiar facts before the Hon'ble Tribunal and the stand of the Department and the assessee before it. 8) The learned Departmental Representative also submitted that the distinction drawn on behalf of the Appellant in the judgements relied on by the CIT (A) was incorrect and that only the obiter dicta of these judgements was read on behalf of the Appellant to incorrectly distinguish the judgements. The arguments of the learned Departmental Representative are incorrect on the following grounds: a. MK Rajeshwari (pg. 133 to 148 of paperbook 1) - A perusal of para 8 of this judgement (@pg. 146) shows that the assessing officer in that case had examined SEBI's findings and had brought out sufficient material to demonstrate that the transactions were not genuine, the findings were not controverted by the assessee by placing evidence, there is a finding in this judgement that the "Revenue has brought sufficient...

Operative decision and relief

18. Therefore, we respectfully follow the ratio of the above decisions and inclined to allow the grounds raised by the assessee. Accordingly the ground raised by the assessee is allowed.

Authorities and precedents appearing in the judgment

• ITA NO. 2065/MUM/2023 (A.Y. 2014-15) v. Farzad Sheriar Jehani
• Sumati Dayal v. CIT (214 ITR 801)
• Durga Prasad More v. CIT and
• CIT v. P. Mohankala and decision of Delhi ITAT in the case of Hersh Win
• Chadha v. DCIT (ITA No. 3088 to 3098 & 3107/Del/2015)
• Udit Kalra vs. ITO (Delhi High Court)
• The Pr Commissioner Of Income Tax ... vs Prem Pal Gandhi C/O
• Indore vs Acit-4(1)
• Dipesh Ramesh Vardhan vs. DCIT (ITAT Mumbai)
• DCIT vs. Rakesh Saraogi & Sons (HUF) (ITAT Raipur)
• Ramprasad Agarwal vs. ITO (ITAT Mumbai)
• Punjab and Haryana High Court in the case of CIT v. Prem Pal

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Penny-stock LTCG; investor nexus to manipulation. The operative result is classified as Dismissed. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Penny-stock LTCG; investor nexus to manipulation. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Build a transaction-level evidence file: confirmations, bank trail, invoices, ledger, tax/GST records and counter-party material rather than relying on a generic explanation.
• Where the addition depends on a third-party statement or investigation report, record the request for the relied material and cross-examination at the earliest stage.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

Read / download the clean local judgment copy

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