The Assessing Officer has added my long-term capital gain on a share whose price rose 4,849%, relying on the Investigation Wing's penny-stock report. Is the price rise by itself enough?
No. The Delhi High Court accepted that the price movement and the company's financials were odd, and still refused to sustain the addition. The assessee had bought online, paid through a bank, held the shares in demat form and sold through the demat account with sale proceeds received by banking channel. The officer issued notices under ss.133(6)/131 to the company and to the entity that had paid for the shares; they produced nothing and came back unserved, and he then went no further. On that record the Court held the finding that there was an arrangement to convert unaccounted money was an assumption based on conjecture, and that suspicion is not proof. Read it with the contrary Calcutta line in PCIT v Swati Bajaj, which the library also carries.
Decided by the High Court (Rajiv Sahai Endlaw J and Sanjeev Narula J; judgment delivered orally by Sanjeev Narula J) on 2021-01-15, reported as ITA 125/2020 with ITA 130/2020 and ITA 131/2020 (Delhi High Court). It bears on section 68, section 10(38), section 115BBE, section 133(6), section 131, section 260A of the Income Tax Act 1961, in Capital Gains, Cash Credits & Unexplained Money, Evidence & Burden of Proof and Assessment & Scrutiny matters.
This is the cleanest High Court statement of what the Revenue must actually put on the file before a penny-stock addition can stand, and it is the authority most often quoted in first appeals. It does not say the assessee always wins: it says the enquiry has to be finished, and that a general modus-operandi report plus an astonishing price chart is not a substitute for evidence connecting this assessee to the arrangement.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, an individual, returned income from interest on fixed deposits, NSC and bank accounts for assessment year 2015-16 and claimed Rs. 96,75,939 as long-term capital gain exempt under s.10(38) on the sale of shares of M/s Gold Line International Finvest Limited. The Assessing Officer treated the gain as a colourable device and added it under s.68 read with s.115BBE as bogus long-term capital gain on the sale of penny stock. His conclusion rested chiefly on the financials of the company and on a 4849.2% rise in its share price over two years, read together with search and survey operations carried out by the Investigation Wing at Kolkata, Delhi, Mumbai and Ahmedabad which set out the modus operandi of providing bogus long-term capital gain entries. Notices under ss.133(6) and 131 were issued to the company but produced nothing, and a notice to Salasar Trading Company, which had paid for the shares, was returned unserved; the officer took the matter no further. The CIT(A) confirmed. The Tribunal deleted the addition by a common order dated 6 August 2019 covering assessment years 2014-15 and 2015-16, holding that the officer had relied on statements recorded by the Investigation Wing without independent enquiry or corroboration. The Revenue appealed under s.260A, relying on the Office Memorandum dated 16 September 2019 to overcome the monetary limits and on Suman Poddar v. ITO and Sumati Dayal v. CIT.
The Revenue's appeals were dismissed. The shares had been purchased online, payment made through banking channels, the shares dematerialised, the sales routed from the demat account and the consideration received through banking channels. The officer's conclusion that the assessee had entered into an arrangement to convert unaccounted money into fictitious long-term capital gain was unsupported by any material on record and was an assumption based on conjecture. No evidence was pointed out to show that money changed hands between the assessee and the broker or any other person. No question of law, much less a substantial question of law, arose (paras 11 to 14).
The Court did not quarrel with the officer's analysis of the price movement or of the company's financials; it was concerned with the conclusion drawn from that analysis (para 11). Reliance on the Investigation Wing report, without further corroboration on the basis of cogent material, does not justify a finding that the transaction is a racket of accommodation entries. The officer had begun to enquire into the infusion of the assessee's unaccounted money but did not dig deeper: the notices to the company yielded nothing and the notice to the payer came back unserved, after which he simply fell back on the company's financials (para 11). The Tribunal, as the last fact-finding authority, was right to hold that the initial onus under s.68 had been discharged, and there was no perversity in its order (para 13). The Court expressly declined to decide the issue on suspicion or on the theory of human behaviour and preponderance of probabilities where documentary evidence stood unrebutted, and distinguished Suman Poddar as a case decided on its own facts, in particular a lack of evidence of an actual sale, and Sumati Dayal likewise (para 12).
Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court accepted that the price movement and the company's financials were odd, and still refused to sustain the addition. The assessee had bought online, paid through a bank, held the shares in demat form and sold through the demat account with sale proceeds received by banking channel. The officer issued notices under ss.133(6)/131 to the company and to the entity that had paid for the shares; they produced nothing and came back unserved, and he then went no further. On that record the Court held the finding that there was an arrangement to convert unaccounted money was an assumption based on conjecture, and that suspicion is not proof. Read it with the contrary Calcutta line in PCIT v Swati Bajaj, which the library also carries. This was decided by the High Court (Rajiv Sahai Endlaw J and Sanjeev Narula J; judgment delivered orally by Sanjeev Narula J) and bears on section 68, section 10(38), section 115BBE, section 133(6), section 131, section 260A of the Income Tax Act 1961. It is reported as ITA 125/2020 with ITA 130/2020 and ITA 131/2020 (Delhi High Court). This is the cleanest High Court statement of what the Revenue must actually put on the file before a penny-stock addition can stand, and it is the authority most often quoted in first appeals. It does not say the assessee always wins: it says the enquiry has to be finished, and that a general modus-operandi report plus an astonishing price chart is not a substitute for evidence connecting this assessee to the arrangement. If it applies to you, the first step is this: Build the documentary trail first and completely: contract notes, the broker's ledger, the demat transaction statement showing the shares in and out, and bank statements for both legs. Krishna Devi turns on that trail being unbroken.
The assessee, an individual, returned income from interest on fixed deposits, NSC and bank accounts for assessment year 2015-16 and claimed Rs. 96,75,939 as long-term capital gain exempt under s.10(38) on the sale of shares of M/s Gold Line International Finvest Limited. The Assessing Officer treated the gain as a colourable device and added it under s.68 read with s.115BBE as bogus long-term capital gain on the sale of penny stock. His conclusion rested chiefly on the financials of the company and on a 4849.2% rise in its share price over two years, read together with search and survey operations carried out by the Investigation Wing at Kolkata, Delhi, Mumbai and Ahmedabad which set out the modus operandi of providing bogus long-term capital gain entries. Notices under ss.133(6) and 131 were issued to the company but produced nothing, and a notice to Salasar Trading Company, which had paid for the shares, was returned unserved; the officer took the matter no further. The CIT(A) confirmed. The Tribunal deleted the addition by a common order dated 6 August 2019 covering assessment years 2014-15 and 2015-16, holding that the officer had relied on statements recorded by the Investigation Wing without independent enquiry or corroboration. The Revenue appealed under s.260A, relying on the Office Memorandum dated 16 September 2019 to overcome the monetary limits and on Suman Poddar v. ITO and Sumati Dayal v. CIT. The matter was decided on 2021-01-15 by the High Court (Rajiv Sahai Endlaw J and Sanjeev Narula J; judgment delivered orally by Sanjeev Narula J). On those facts the High Court held as follows. The Revenue's appeals were dismissed. The shares had been purchased online, payment made through banking channels, the shares dematerialised, the sales routed from the demat account and the consideration received through banking channels. The officer's conclusion that the assessee had entered into an arrangement to convert unaccounted money into fictitious long-term capital gain was unsupported by any material on record and was an assumption based on conjecture. No evidence was pointed out to show that money changed hands between the assessee and the broker or any other person. No question of law, much less a substantial question of law, arose (paras 11 to 14).
The Court did not quarrel with the officer's analysis of the price movement or of the company's financials; it was concerned with the conclusion drawn from that analysis (para 11). Reliance on the Investigation Wing report, without further corroboration on the basis of cogent material, does not justify a finding that the transaction is a racket of accommodation entries. The officer had begun to enquire into the infusion of the assessee's unaccounted money but did not dig deeper: the notices to the company yielded nothing and the notice to the payer came back unserved, after which he simply fell back on the company's financials (para 11). The Tribunal, as the last fact-finding authority, was right to hold that the initial onus under s.68 had been discharged, and there was no perversity in its order (para 13). The Court expressly declined to decide the issue on suspicion or on the theory of human behaviour and preponderance of probabilities where documentary evidence stood unrebutted, and distinguished Suman Poddar as a case decided on its own facts, in particular a lack of evidence of an actual sale, and Sumati Dayal likewise (para 12). In the words reproduced by the source cited on this page: "Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent." The decision followed or applied Suman Poddar v. ITO — distinguished on facts; Sumati Dayal v. CIT — distinguished as turning on its own specific facts.
It was decided by the High Court on 2021-01-15 and is reported as ITA 125/2020 with ITA 130/2020 and ITA 131/2020 (Delhi 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 115BBE, section 133(6), section 131, section 260A, 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 appeals were dismissed. The shares had been purchased online, payment made through banking channels, the shares dematerialised, the sales routed from the demat account and the consideration received through banking channels. The officer's conclusion that the assessee had entered into an arrangement to convert unaccounted money into fictitious long-term capital gain was unsupported by any material on record and was an assumption based on conjecture. No evidence was pointed out to show that money changed hands between the assessee and the broker or any other person. No question of law, much less a substantial question of law, arose (paras 11 to 14). It arises in Capital Gains, Cash Credits & Unexplained Money, Evidence & Burden of Proof and Assessment & Scrutiny matters, on section 68, section 10(38), section 115BBE, section 133(6), section 131, section 260A of the Income Tax Act 1961, and was decided by Rajiv Sahai Endlaw J and Sanjeev Narula J; judgment delivered orally by Sanjeev Narula 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. Read the assessment order for what the officer actually did rather than what he asserted. Note every notice under s.133(6) or s.131 that went unanswered or unserved and was not followed up; that gap is the point the Court seized on. Ask, in writing, for a copy of every statement, report and investigation document relied on, and for the maker of any statement to be produced for cross-examination. Record the refusal. The library carries Andaman Timber Industries, Kishinchand Chellaram and Odeon Builders on that requirement. Put on record that no material shows money moving between you and the broker or any entry operator. That specific absence is what the Court held fatal. Do not rely on this case alone if your appeal lies in Calcutta or if the file also contains a SEBI order, an admission, or a statement naming you. Swati Bajaj takes a materially different approach, and the same Delhi Bench has upheld additions where the assessee's record was thinner. Deal separately with the s.115BBE rate consequence, which follows the s.68 addition and is often ignored until it is too late.
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. But the High Courts do not speak with one voice on the question it decides. The Calcutta High Court in PCIT v. Swati Bajaj (14 June 2022), which this library already carries, upheld additions on a batch of penny-stock appeals on an approach that gives far greater weight to the Investigation Wing material and to preponderance of probabilities, and the Delhi High Court itself sustained an addition in a later Delhi appeal on a thinner record v. PCIT (29 July 2020) on a record where the assessee produced little beyond contract notes. Check which High Court's view binds your assessing officer and your Tribunal bench before relying on this decision as decisive. 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.
Indian Kanoon titles this page 'Principal Commissioner Of Income Tax vs Smt. Bindu Garg', Bindu Garg being the respondent in one of the three connected appeals; the same common judgment disposes of ITA 125/2020 (Krishna Devi), ITA 130/2020 and ITA 131/2020, and it is universally cited as PCIT v Smt. Krishna Devi. Paragraphs 11, 12 and 13 were transcribed verbatim from the source page; paragraphs 1 to 10 and 14 to 15 were read in the source page's rendering but not separately transcribed word for word, which is why the evidence field says judgment_partial. No report citation is given here because none could be confirmed from a permitted source. 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 appeals were dismissed. The shares had been purchased online, payment made through banking channels, the shares dematerialised, the sales routed from the demat account and the consideration received through banking channels. The officer's conclusion that the assessee had entered into an arrangement to convert unaccounted money into fictitious long-term capital gain was unsupported by any material on record and was an assumption based on conjecture. No evidence was pointed out to show that money changed hands between the assessee and the broker or any other person. No question of law, much less a substantial question of law, arose (paras 11 to 14).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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