Kantaben Bhogilal Kubadia v. ITO

Case snapshot

Sections / provisions: 68

Questions before the Court / Tribunal

• Penny-stock LTCG; NCL Research; cross-examination: The reported decision examines whether an unexplained-credit addition can rest on general investigation material or third-party material without sufficiently connecting it to the taxpayer and providing a fair opportunity to rebut it.

Material facts and background

countrywide investigation in order to unearth the organized racket generating LTCG which is exempt from Income Tax. A detailed investigation was conducted, and the investigation report was sent to all the AOs who were assessing such cases. Therefore, on the basis of the said investigation carried out by the Investigation Wing, Kolkata, the case of the assessee was reopened. During the course of the assessment proceedings, the AO concluded that the LTCG claimed by the assessee was pre-arranged and bogus and, therefore, rejected the entire capital gain received on the sale of shares and added the same as taxable income under Section 68 of the Act without allowing the exemption under Section 10(38) of the Act. 7.

On the contrary, it was submitted that the assessee had purchased

20,000 preferential shares and, in this regard, had relied upon the following documents: i] Copy of Purchase Bill ii] Copy of Bank Statements iii] Copy of Balance Sheet of the assessee as on 31.03.2012 iv] Copy of Demat Account 8.

The assessee sold 6,200 shares of M/s. NCL Research & Financial

Services Ltd. during the year under consideration on the Bombay Stock Exchange through the broker M/s. MNS Securities Ltd. In support of the

sale, the assessee furnished the following details before the Assessing Officer during the course of the assessment proceedings: i] Copy of Contract Notes ii] Copy of Bank Statements iii] Copy of Demat Account 9.

However, the claim of the assessee was rejected on the basis of the

Appellant / assessee submissions

In this regard, the ld. AR invited our attention to the statement on oath

Revenue / respondent submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Court / Tribunal analysis and reasoning

does not mean that the capital gain earned is bogus. We find that the purchase transactions have taken place through banking channels, the shares are held in dematerialized form, and the sale transactions have taken place on a recognized stock exchange and have been subjected to Securities Transaction Tax (STT). Thus, considering the totality of the facts, the market price of an equity share on the stock exchange cannot be controlled by an individual, and market prices keep fluctuating depending upon various factors. Therefore, there is no question of the capital gain being bogus. 13.

Authorities, we find that the facts involved therein are clearly distinguishable from the facts of the present case. In all the above cases, the source of purchase or the genuineness of the purchase transactions was not proved, and hence the capital gain so earned was treated as bogus. However, in the present case, the source of purchase and the genuineness of the transactions stand duly proved, and the same has not been controverted by the AO. 15.

with the market rates prevailing on the respective dates as is seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions cannot be a ground to treat the transactions as trade transactions as a sham transaction. V] High Court of Rajasthan at Jodhpur in case of CIT Vs. Smt Sumitra Devi in ITA 54/2012 has held that:True it is that several suspicious circumstances were indicated by the AO but then, the findings as ultimately recorded by him had been based more on presumptions rather than on cogent proof. As found concurrently by the CIT(A) and the ITAT, the AO had failed to show that the material documents placed on record by the assessee like broker's note, contract note, relevant extract of cash book, copies of share certificate, de-mat statement etc. were false, fabricated or fictitious. The appellate authorities have rightly observed that the facts as noticed by the AO, like the notice under Section 136 to the company having been returned unserved; delayed payment to the brokers; and de-materialisation of shares just before the sale would lead to suspicion and call for detailed examination and verification...

Gupta in ITA No. 731/Kol/2018, has dealt with the said scrip and deleted the addition based on the same scrip and the operative portion of the same is reproduced herein below: 22. We note that the coordinate bench of this Tribunal in the case of Prakash Chand Bhutoria ITA No. 2394/Kol/2017 dated 27.06.2018 upheld the assessee's claim of LTCG on sale of shares of M/s. Unno Industries Ltd. for AY 2014-15, as in the instant case before us so respectfully following the decision and also taking note of the documents filed before us (paper book page 19 to 31) from which we note that assessee has discharged its onus to prove the genuineness of the transaction of the purchase of shares by filing the share certificate along with share transfer advice of Pinnacle Vintrade Ltd (pages 19 to 21PB) and the purchases having taken place through bank transaction (page 23 PB) and later bonus share allotment letter (page 25PB) and bonus share certificate (page 24 PB) and thereafter by virtue of Amalgamation scheme allotment letter of M/s Unno Industries Ltd (page 26 PB) which were sold through registered broker of Bombay Stock Exchange (M/s. Anand Rathi Securities Ltd). and sale of scrips is...

PB) and transaction happened through banking transaction (page 28 of paper book). Since AO/Ld. CIT(A) could not find any fault or specific adverse materials against the assessee/broker/ or scrips of M/s. NCL, the addition u/s. 68 cannot be sustained. The addition based on a common/general report of DIT (Inv.) and there is nothing in the report specifically against the assessee, cannot be the basis for making the addition or draw adverse inference against the assessee. So the action of AO/Ld. CIT(A) cannot be sustained and therefore, the claim of exempt income on LTCG on sale of scrips of M/s. NCL has to be allowed and, therefore, the addition on this issue is directed to be deleted.

Ground Nos. 1 and 2, Ground No. 3 raised by the assessee becomes consequential in nature and, therefore, does not require separate adjudication. 23.

Operative decision and relief

In the result, the appeal filed by the assessee stands partly allowed.

Authorities and precedents appearing in the judgment

• A) Sumati Dayal vs. CIT
• B) Durga Prasad More vs. CIT
• C) CIT vs. P. Mohankala
• D) ITO vs. Usha Chandresh Shah
• E) Ratnakar M. Pujari vs. ITO
• Tribunal at Kolkata in case of DCIT vs Sunita Khema in ITA nos 714 to
• CIT vs. Jamnadevi (328 ITR 656) has observed in paragraphs 11 & 12 as under

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; NCL Research; cross-examination. The operative result is classified as Partly Allowed. 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; NCL Research; cross-examination. 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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