SEBI has found that the broker rigged the price of the scrip I sold. Does that finding by itself make my capital gain bogus?
No. The Bombay High Court dismissed the Revenue's appeal where the shares had been bought on the floor of the Kolkata Stock Exchange through a registered broker, paid for by cheque, held in demat for more than a year and sold on the floor of the exchange with contract notes and bills produced and the sale proceeds received from the exchange. The Assessing Officer's case was that the scrip was a penny stock, that the broker had been found by SEBI to have manipulated the price through synchronised cross-deals, and that the price had gone from Rs. 3.12 to Rs. 155.04 in two years. That was held not to be enough, because the price manipulation was the broker's conduct and nothing connected the assessee to it.
Decided by the High Court (K.R. Shriram J and Firdosh P. Pooniwalla J) on 2023-07-12, reported as Income Tax Appeal No. 454 of 2018; neutral citation 2023:BHC-OS:6615-DB (Bombay High Court). It bears on section 68, section 10(38), section 147, section 148, section 143(3) of the Income Tax Act 1961, in Capital Gains, Cash Credits & Unexplained Money and Evidence & Burden of Proof matters.
A SEBI order against the broker or the company is the single most common piece of material the Revenue leads in these assessments after the Investigation Wing report. This decision draws the distinction that matters: wrongdoing by the broker or by the promoters is not, without more, wrongdoing by the client who transacted on the exchange floor. It is a Division Bench of the Bombay High Court, and a later penny-stock appeal in that Court was dismissed on a Tribunal order that had relied on it.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2005-06 the assessee HUF bought 3,000 shares of Ramkrishna Fincap Ltd. at Rs. 3.12 per share on the floor of the Kolkata Stock Exchange through a registered share broker in 2003, paid the purchase price by cheque, and had the shares credited to its demat account, where they remained for more than a year. The shares were sold through the same broker on the floor of the Kolkata Stock Exchange in 2005 at Rs. 155.04 per share, delivery being effected by demat instruction slip and payment received from the Kolkata Stock Exchange and deposited in the assessee's bank account. The assessment was reopened under s.148. The Assessing Officer held the scrip to be a penny stock and the gain an accommodation entry, relying on the fact that the broker had been found to have manipulated the price of the scrip through synchronised and cross deals and that SEBI had passed an order on irregularities in trading in the RFL scrip, and added the gain under s.68. The CIT(A) deleted the addition and the Tribunal dismissed the Revenue's appeals by order dated 27 May 2016.
The Revenue's appeal was dismissed. The Court found no infirmity in the order of the Tribunal and held that no substantial question of law as proposed arose (para 5). The concurrent findings were that the shares were bought on the floor of the stock exchange and not from the broker, that delivery was taken, that contract notes were issued, and that the shares were also sold on the floor of the stock exchange (para 4).
The CIT(A) had noted that the Assessing Officer himself recorded that SEBI had conducted an independent enquiry into the broker and into the RFL scrip and had conclusively found that it was the broker who inflated the price; the CIT(A) also found nothing wrong in the assessee having done only one transaction with that broker. Against that background the CIT(A) traced each limb of the transaction: purchase on the floor of the Kolkata Stock Exchange through a registered broker, invoice raised, purchase price paid by cheque and debited to the assessee's bank account, transfer into the demat account where the shares remained for more than a year, sale on the exchange on various dates, contract notes cum bills produced in the appellate proceedings, delivery by demat instruction slip, and payment received from the exchange and deposited in the bank. On that footing there was no reason to treat the capital gain as an unexplained cash credit under s.68, and the Tribunal rightly concluded there was no merit in the Revenue's appeal (para 4).
The tribunal while dismissing the appeals filed by the Revenue also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange.
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Handle my notice → Ask a CA on WhatsAppNo. The Bombay High Court dismissed the Revenue's appeal where the shares had been bought on the floor of the Kolkata Stock Exchange through a registered broker, paid for by cheque, held in demat for more than a year and sold on the floor of the exchange with contract notes and bills produced and the sale proceeds received from the exchange. The Assessing Officer's case was that the scrip was a penny stock, that the broker had been found by SEBI to have manipulated the price through synchronised cross-deals, and that the price had gone from Rs. 3.12 to Rs. 155.04 in two years. That was held not to be enough, because the price manipulation was the broker's conduct and nothing connected the assessee to it. This was decided by the High Court (K.R. Shriram J and Firdosh P. Pooniwalla J) and bears on section 68, section 10(38), section 147, section 148, section 143(3) of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 454 of 2018; neutral citation 2023:BHC-OS:6615-DB (Bombay High Court). A SEBI order against the broker or the company is the single most common piece of material the Revenue leads in these assessments after the Investigation Wing report. This decision draws the distinction that matters: wrongdoing by the broker or by the promoters is not, without more, wrongdoing by the client who transacted on the exchange floor. It is a Division Bench of the Bombay High Court, and a later penny-stock appeal in that Court was dismissed on a Tribunal order that had relied on it. If it applies to you, the first step is this: Establish, and put in writing, that the purchase and the sale were both on the floor of a recognised stock exchange and not off-market from the tainted broker. That distinction carried this case.
For assessment year 2005-06 the assessee HUF bought 3,000 shares of Ramkrishna Fincap Ltd. at Rs. 3.12 per share on the floor of the Kolkata Stock Exchange through a registered share broker in 2003, paid the purchase price by cheque, and had the shares credited to its demat account, where they remained for more than a year. The shares were sold through the same broker on the floor of the Kolkata Stock Exchange in 2005 at Rs. 155.04 per share, delivery being effected by demat instruction slip and payment received from the Kolkata Stock Exchange and deposited in the assessee's bank account. The assessment was reopened under s.148. The Assessing Officer held the scrip to be a penny stock and the gain an accommodation entry, relying on the fact that the broker had been found to have manipulated the price of the scrip through synchronised and cross deals and that SEBI had passed an order on irregularities in trading in the RFL scrip, and added the gain under s.68. The CIT(A) deleted the addition and the Tribunal dismissed the Revenue's appeals by order dated 27 May 2016. The matter was decided on 2023-07-12 by the High Court (K.R. Shriram J and Firdosh P. Pooniwalla J). On those facts the High Court held as follows. The Revenue's appeal was dismissed. The Court found no infirmity in the order of the Tribunal and held that no substantial question of law as proposed arose (para 5). The concurrent findings were that the shares were bought on the floor of the stock exchange and not from the broker, that delivery was taken, that contract notes were issued, and that the shares were also sold on the floor of the stock exchange (para 4).
The CIT(A) had noted that the Assessing Officer himself recorded that SEBI had conducted an independent enquiry into the broker and into the RFL scrip and had conclusively found that it was the broker who inflated the price; the CIT(A) also found nothing wrong in the assessee having done only one transaction with that broker. Against that background the CIT(A) traced each limb of the transaction: purchase on the floor of the Kolkata Stock Exchange through a registered broker, invoice raised, purchase price paid by cheque and debited to the assessee's bank account, transfer into the demat account where the shares remained for more than a year, sale on the exchange on various dates, contract notes cum bills produced in the appellate proceedings, delivery by demat instruction slip, and payment received from the exchange and deposited in the bank. On that footing there was no reason to treat the capital gain as an unexplained cash credit under s.68, and the Tribunal rightly concluded there was no merit in the Revenue's appeal (para 4). In the words reproduced by the source cited on this page: "The tribunal while dismissing the appeals filed by the Revenue also observed on facts that these shares were purchased by respondent on the floor of Stock Exchange and not from the said broker, deliveries were taken, contract notes were issued and shares were also sold on the floor of Stock Exchange."
It was decided by the High Court on 2023-07-12 and is reported as Income Tax Appeal No. 454 of 2018; neutral citation 2023:BHC-OS:6615-DB (Bombay High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 68, section 10(38), section 147, section 148, section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed. The Court found no infirmity in the order of the Tribunal and held that no substantial question of law as proposed arose (para 5). The concurrent findings were that the shares were bought on the floor of the stock exchange and not from the broker, that delivery was taken, that contract notes were issued, and that the shares were also sold on the floor of the stock exchange (para 4). It arises in Capital Gains, Cash Credits & Unexplained Money and Evidence & Burden of Proof matters, on section 68, section 10(38), section 147, section 148, section 143(3) of the Income Tax Act 1961, and was decided by K.R. Shriram J and Firdosh P. Pooniwalla J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Produce the demat transaction statement showing the holding period, not merely the holding on two dates; the one-year holding was recorded as a finding of fact. Produce the contract notes cum bills for the sale and show the sale consideration coming from the exchange, not from the broker's own account. If the officer relies on a SEBI order, read it and identify precisely who it names. If it names only the broker or the company, say so and press the point that no finding in it touches the assessee. Anticipate the answer that a single transaction with an unknown broker is itself suspicious. The CIT(A) here found nothing wrong in one transaction, and that finding survived to the High Court. Where the assessment is a reassessment under s.147, keep the jurisdictional grounds alive as well; this assessment was made under s.143(3) read with s.147.
High Courts differ on this point. No later decision doubting or reversing this judgment was located, and no order on any special leave petition against it could be traced; the absence of a traced special leave petition is not the same as confirmation that none was filed. The one later Bombay High Court order that could be verified from a permitted primary source is PCIT-1, Thane v. Komal Kumarpal Shah (Income Tax Appeal No. 642 of 2025, decided 20 November 2025, neutral citation 2025:BHC-OS:21758-DB, M.S. Sonak and Advait M. Sethna JJ), where the Revenue's appeal in a penny-stock case was dismissed and the Court recorded that the Tribunal's order under appeal had referred to this judgment; the High Court there did not itself restate the ratio, so treat it as consistent later practice rather than as a fresh application of the principle. It sits on the taxpayer side of a genuine divide: the Calcutta High Court in PCIT v. Swati Bajaj (ITAT No. 6 of 2022, decided 14 June 2022) takes a markedly different approach on comparable material, and the Madras High Court has sustained additions in penny-stock appeals. That is a difference of principle between different High Courts on the same question, which is why this entry is labelled 'high courts differ'. Its force in your case depends heavily on the two facts that carried it - trades executed on the floor of the exchange, and a SEBI finding directed at the broker rather than at the assessee. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order is short. Paragraphs 4 and 5 were transcribed verbatim; paragraphs 1 to 3 and 6 were read in the source page's rendering but not transcribed word for word. Note that the sentence quoted below is the High Court recording what the Tribunal observed, and is so introduced in the judgment; it is quoted with that introduction intact rather than presented as a free-standing finding of the High Court. The High Court's own words are in para 5. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed. The Court found no infirmity in the order of the Tribunal and held that no substantial question of law as proposed arose (para 5). The concurrent findings were that the shares were bought on the floor of the stock exchange and not from the broker, that delivery was taken, that contract notes were issued, and that the shares were also sold on the floor of the stock exchange (para 4).
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