PCIT v. Zulu Merchandise Pvt. Ltd.

Case snapshot

Sections / provisions: 10(38); 45; 48

Questions before the Court / Tribunal

• Penny-stock capital gains/loss and human-probability test: The reported judgment applies surrounding circumstances, connected trading patterns and the human-probability test to a penny-stock claim. Finin2min should primary-check the exact securities, transaction chronology and whether the disputed item was a gain or loss before stating the ratio.

Material facts and background

Thus, the facts of the case on hand would clearly reveal that it is those two companies in whose shares were traded by the assessee are in the list of

bogus capital loss claim companies and it is undoubtedly the case involving organized tax evasion. Therefore, the revenue are entitled to maintain this appeal by referring to the exception as provided in para 3.1 (h) of the Circular No. 5 of 2024 dated 15.03.2024. Accordingly, substantial questions of law (e) is answered in favour of the revenue. 13.

As observed earlier, the learned tribunal did not examine the merits

of the matter, did not go into the facts of the case, did not touch upon the correctness of the reasoning given by the CIT(A) or that of the assessing officer but referred to the decision of the Coordinate Bench of the tribunal in the case of Namokar Builders Private Limited, extracted the entire judgment running to be more than 15 pages and in the last paragraph, the tribunal states that the facts of the case of the assessee are also “substantially” similar and therefore the appeal was allowed. There is nothing to indicate as to how the tribunal found that the facts of the assessee’s case were identical to the facts in Namokar Builders Private Limited. The expression “substantially similar” used in paragraph 8 of the impugned order would show that the facts are not identically similar. In any event, the tribunal ought to have examined the merits of the matter and noted the facts and should have recorded the reasons as to how the decision in Namokar Builders would apply to the case on hand. That apart, the order passed in the case of Namokar Builders was challenged by the revenue before this Court by filing an appeal in ITAT No. 14 of 2025 wherein

ITAT NO. 88 OF 2025 REPORTABLE 2025:CHC-OS:137-DB

the assessee Namokar Builders Private Limited took a stand that they wish to avail the provisions of the Direct Tax Vivaad Se Vishwas Scheme and accordingly the appeal was disposed of by order dated 05.03.2025 directing the assessee to file the application under the scheme and the department to process the application in accordance with law. Therefore, this court has to take a decision independent of the finding rendered by the tribunal in Namokar Builders Private Limited by taking note of the facts and circumstances. 14.

The assessee though preferred appeal before the appellate authority

Appellant / assessee submissions

known/apprise the investigation report and thereafter the show cause notice was issued for which the assessee submitted a reply and did not seek for any further details of the investigation report. Therefore, the decision in Nilesh Jain (HUF) would not advance the case of the respondent assessee. 21.

Revenue / respondent submissions

Appearance:Mr. Vipul Kundalia, Sr. Adv. Mr. Prithu Dudheria, Sr. Standing Counsel. .….For the Appellant. Mr. Agnibesh Sengupta, Adv. Mr. Dwip Raj Basu, Adv. Mr. Avijit Kar, Adv. …..For the Respondent.

by Mr. Prithu Dudheria, learned Senior Standing Counsel appearing for the appellant revenue and learned Advocate Mr. Agnibesh Sengupta assisted by Mr. Dwip Raj Basu and Mr. Avijit Kar, learned advocates appearing for the respondent assessee. 3.

for the respondent assessee by contending that the tax effect in the instant case is only Rs. 16,27,963/- which is below the prescribed limit as determined by Board Circular 9/2024 dated 17.09.2024 and therefore the revenue cannot prosecute this appeal. The substantial questions of law no.(d) relates to this issue. The learned Senior Advocate appearing on behalf of the appellant revenue submitted that the Board has issued a recent Circular in Circular No.5 of 2024 dated 15.03.2024 which is in supersession of the communications issued by the Board in respect of departmental

portion of the investigation report has been noted in full. A careful reading of the some would show that the assessee has not been named in the report. If such be the case, unless and until the assessee shows and proves that she/he was prejudiced on account of such report / statement mere mentioning that non-furnishing of the report or non-availability of the person for cross examination cannot vitiate the proceedings. The assessees have miserably failed to prove the test of prejudice or that the test of fair hearing has not been satisfied in their individual cases. In all the cases, the assessees have been issued notices under Sections 143(2) and 142(1) of the Act they have been directed to furnish the documents, the assessee have complied with the directions, appeared before the assessing officer and in many cases represented by Advocates/Chartered Accountants, elaborate legal submissions have been made both oral and in writing and thereafter the assessments have been completed. Nothing prevented the assessee from mentioning that unless and until the report is furnished and the statements are provided, they would not in a position to take part in the inquiry which is being...

Court / Tribunal analysis and reasoning

course of business and the loss resulting from penny stocks are eligible to be set off against the income earned by the assessee during the year. The revenue resisted the prayer made by the assessee by contending that the stocks were part of the list of 84 penny stocks and the loss generated from dealing in the equity share was apparently accommodation entries and therefore rightly rejected by the authority. In support of their contention, reliance was placed on the decision of this Court in Swati Bajaj. The learned Tribunal did not examine the facts of the assessee’s case but

proceeded to quote the entire decision in the case of Namokar Builders and in the last paragraph, of the impugned order, para 8, the tribunals holds that the facts in the assesseee’s case are substantially similar and therefore they are following the decision of the Coordinate Bench and accordingly set aside the order passed by the appellate authority and directed the assessing officer to allow the set off loss on equity shares against interest income. Aggrieved by the same, the revenue has preferred the present appeal. 9.

for the respondent assessee by contending that the tax effect in the instant case is only Rs. 16,27,963/- which is below the prescribed limit as determined by Board Circular 9/2024 dated 17.09.2024 and therefore the revenue cannot prosecute this appeal. The substantial questions of law no.(d) relates to this issue. The learned Senior Advocate appearing on behalf of the appellant revenue submitted that the Board has issued a recent Circular in Circular No.5 of 2024 dated 15.03.2024 which is in supersession of the communications issued by the Board in respect of departmental

Supreme Court. Para 3.1 of the circular states the monetary limits given with regard to the filing appeal/SLP shall be applicable to all cases including those relating to TDS/TCS under the Act. With the exceptions set out therein, where the decision to file appeal/SLP shall be taken on merits, without regard to the tax effect and the monetary limits. The revenue seeks to bring the case on hand under Exception (h) in para 3.1 of the Circular which deals with cases involving organized tax evasion including cases of bogus capital gains/loss through penny stocks and case of accommodation entries. It is submitted by the learned advocate appearing for the respondent that there is nothing to indicate that the assessee was involved in an organized tax evasion and therefore the revenue cannot seek to maintain this appeal by referring to the exception in para 3.1 (h) of the Circular No. 5 of the 2024. 10.

referred to the finding recorded by the assessing officer in the assessment order dated 26.12.2016. The assessing officer upon examination of the details which were furnished by the assessee and upon thorough examination of the facts and attendant circumstances noticed that the two companies had no worth and they had no proper business activities. Therefore, the assessing officer opined that no prudent businessmen will buy such huge number of shares in the abovementioned two companies. Furthermore, the particular scripts which were dealt with by the assessee were mentioned in the list of bogus capital loss claims. The investigation

bogus capital loss claim companies and it is undoubtedly the case involving organized tax evasion. Therefore, the revenue are entitled to maintain this appeal by referring to the exception as provided in para 3.1 (h) of the Circular No. 5 of 2024 dated 15.03.2024. Accordingly, substantial questions of law (e) is answered in favour of the revenue. 13.

of the matter, did not go into the facts of the case, did not touch upon the correctness of the reasoning given by the CIT(A) or that of the assessing officer but referred to the decision of the Coordinate Bench of the tribunal in the case of Namokar Builders Private Limited, extracted the entire judgment running to be more than 15 pages and in the last paragraph, the tribunal states that the facts of the case of the assessee are also “substantially” similar and therefore the appeal was allowed. There is nothing to indicate as to how the tribunal found that the facts of the assessee’s case were identical to the facts in Namokar Builders Private Limited. The expression “substantially similar” used in paragraph 8 of the impugned order would show that the facts are not identically similar. In any event, the tribunal ought to have examined the merits of the matter and noted the facts and should have recorded the reasons as to how the decision in Namokar Builders would apply to the case on hand. That apart, the order passed in the case of Namokar Builders was challenged by the revenue before this Court by filing an appeal in ITAT No. 14 of 2025 wherein

Operative decision and relief

substantial questions of law raised in this appeal is identical to the substantial questions of law raised in the case of Brightstar and the said appeal was disposed of on the ground of low tax effect. We find from the said order that no objection appears to have been taken by the department to bring case under any one of the exceptions which have been curbed out in Circular No. 5 of 2024 dated 15.03.2024. In the preceding paragraphs, we have dealt with this issue in detail and recorded our conclusions that the case on hand would fall within the exception as contained in paragraph

For all the above reasons, the appeal is allowed the order passed by

Authorities and precedents appearing in the judgment

• No reliable precedent list was extracted automatically; use the full judgment for the citation chain.

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 capital gains/loss and human-probability test. The operative result is classified as 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 capital gains/loss and human-probability test. 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.
• Maintain a date-and-payment matrix for transfer, agreement, possession, investment and construction; capital-gains exemptions commonly turn on this chronology.
• 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

Related Finin2min guidance