Puja Gupta Vs ITO (ITAT Delhi)

Income Tax Appellate Tribunal (ITAT) Delhi heard an appeal filed by Puja Gupta against the order of the Commissioner of Income Tax (Appeals)-6, New Delhi. The case centered on the addition of ₹1,69,12,820 to Gupta’s taxable income under Section 68 of the Income Tax Act, alleging unexplained cash credit. The Assessing Officer (AO) claimed that Gupta’s transactions involving shares of Dhanleela Investment & Trading Co. Ltd. were part of a pre-arranged scheme to create artificial long-term capital gains (LTCG). Additionally, an amount of ₹5,07,385 was added as unexplained expenditure under Section 69. The CIT(A) upheld these additions, citing the lack of genuine financial backing for the share price increase.

Gupta argued that her transactions were supported by documentary evidence, including bank statements, contract notes, demat statements, and financial records. She pointed out that her dealings were carried out through a registered stockbroker and that securities transaction tax (STT) was duly paid. Furthermore, she contended that the AO’s reliance on statements from third-party brokers, Sri Anil Khemka and Sri Harshvardhan Kayan, was unfair since she had no transactions with them, and their statements were neither provided to her nor was she given the opportunity to cross-examine them. Citing the Supreme Court ruling in Andaman Timber Industries v. CCE (2015), Gupta maintained that such evidence should not be used against her.

The ITAT observed that all aspects of Gupta’s share transactions were backed by valid documentation. It found that while suspicions regarding price manipulation in Dhanleela Investment & Trading Co. Ltd. were valid, the Revenue failed to establish any direct link between Gupta and the alleged fraudulent activities. The tribunal emphasized that mere suspicion or general trends in penny stock trading could not be used to disregard specific transactions without clear evidence of wrongdoing. It also noted that the Revenue had not proven that Gupta engaged in cash transactions or circular trading. The tribunal referenced ITO vs. Pirai Choodi (SC) to highlight that evidence must be directly linked to the assessee.

Consequently, ITAT Delhi ruled in favor of Gupta, holding that the AO’s findings were based on assumptions and lacked concrete evidence. The tribunal deleted the additions made under Sections 68 and 69, reiterating that tax assessments must be based on facts rather than mere probabilities. This decision reinforces the principle that documented and legally compliant share transactions should not be disregarded without substantiated proof of manipulation.

FULL TEXT OF THE ORDER OF ITAT DELHI

This is an appeal filed by the assessee against the order of Commissioner of Income Tax ( Appeals)- 6, New Delhi dated 18.09.2018.

2. The assessee has raised the following grounds of appeal:

“A. That the learned CIT ( Appeals) has erred in upholding the addition of Rs. 1,69 ,12,820/- made to the taxable income of the assessee by the Assessing Officer on the allegation of unexplained cash credit u/ s 68 of the Act.

 B. That the learned CIT ( Appeals)   has   erred   in holding that the onus to prove the source of funds amounting to Rs.1,69,12,820/- was not discharged by the assessee.

C. That the learned CIT ( Appeals) has further erred in holding that the documents submitted as evidence by the assessee to prove the genuineness of transactions are a smoke screen to cover up the true nature of the

D. That the learned CIT( Appeals) has erred in drawing adverse inference against the assessee merely on the basis of general modus operandi of certain persons with whom the assessee has never transacted and with whom no connection or nexus was proved or brought on record by the Assessing

E. That the addition made by the Assessing Officer and upheld by the learned CIT ( Appeals) is based merely on suspicion, surmises and conjectures and that the learned CIT ( Appeals) ought to have deleted the addition

 F. That the learned CIT ( Appeals) has erred in upholding the addition of 5,07, 385/- made by the Assessing Officer on the allegation of unexplained expenditure u/ s 69 of the Act even when there is no material brought on record to show that the assessee has actually incurred this expenditure or has made any such payment.”

3.Since, all the grounds of appeal are inter- connected and facts are common they are being disposed off together as under.

4. We have heard the rival submissions and perused the orders of the lower authorities and materials available on In the instant case, the assessee purchased 10,000 shares of  M/ s  Dhanleela  Investment  &  Trading  Co.  Ltd. ( erstwhile Ratni Investments Company Limited) on 29.10.2012 of Face Value of Rs.10 per share at a premium of Rs.80 per share on preferential allotment of shares by the company to the assessee. The payment of purchase consideration was made by cheque 436015 drawn on Syndicate Bank, I.P. Estate Branch, New Delhi. Thereafter, the assessee received 40,000 Bonus shares in the Ratio of 1: 4 shares on 15.2.2013 from the company. Thus, the total holding of the assessee became 50,000 shares. Further, on 12.10. 2013 the share was split by the company into shares of Face value of Rs.2/- per share. Then, the share holding of the assessee became of 2,50,000 shares of Face value of Rs.2/- per share at an average cost of Rs.3.60 per share.

5. Out of this, the assessee sold 82, 250 shares @ 205 to Rs.207 per share during the period from 12.12.2013 to 11.03.2014 and realised total sale consideration of Rs.1,69,12,830/-. These shares were sold by the assessee through i ts Broker Pee AAR Securities Ltd., New Delhi in Bombay Stock Exchange on which STT was paid. In the Return of Income filed for the assessment year 2014- 15, the assessee showed Long  Term  Capital  Gains  of  Rs.1,66,16,726/- ( Rs.1,69,12,830 – Rs.2,96,100) and claimed the same as exempt under section 10( 38) of the Act.

6. The Assessing Officer observed that during the Financial Year 2011- 12, the Authorized & Paid- up Capital of M/ s Dhanleela Investment & Trading Company Limited was 20,00,000/- which substantially increased in the Financial Year 2012- 13 to Rs.9,47,00 ,000/-. Thus, an amount of more than Rs.9 crores was collected by M/ s Danleela Investment & Trading Company Limited during Financial Year 2012- 13 by making preferential allotment for which no particular reason can be deduced from the financial results of the company or any other parameter in the Annual report or disclosure made by the company. Thus, the sudden increase in share capital without any cogent reason raises a suspicion that the increase is predetermined action with specific intention. Further in the Balance Sheet there is no fixed Asset or any tangible Asset having value to support that any business activity was ever conducted by the company.

7. The Assessing officer observed that the share price of M/ s Danleela Investment & Trading Company Limited sky rocketed without having any financial The parameters which are essential for increase of price of share are not present. In absence of backing financial results i t can be concluded that the increase is due to artificial increase by circular trading of shares forming cartel. Thus, the trend observed above again lead to the conclusion that prices of the shares of M/ s Danleela Investment & Trading Company limited were artificially hiked to create non- genuine LTCG to the beneficiaries.

8. The Assessing Officer also observed that statements were also recorded by the investigation Wing in other cases of various brokers, operators and entry providers, who accepted that M/ s Danleela Investment & Trading Company limited is a Penny Stock company and the scrip has been used to provide bogus LTCG to various Sri Anil Khemka’s, statement was recorded on 30 . 03.2015 before DDIT ( Inv), Kolkata and Sri Harshvardhan Kayan’s statement was recorded on 27.01.2015 before DDIT ( Inv), Kolkata in which they have admitted that the script M/ s Danleela Investment & Trading Company limited was used to provide bogus LTCG to various beneficiaries. Thereafter the Assessing Officer after explaining the modus operandi of bogus LTCG held that the transactions of the assessee were a sham transaction and were entered as a colourable device for avoidance of tax and the receipt of Rs1,69,12,820/- by way of cheques was nothing but unexplained Cash Credits under section 68 of the Act to be taxed @30% under section 115BBE of the Income Tax Act, 1961 in the hands of the assessee.

9. On Appeal, the Commissioner of Income Tax ( Appeals) confirmed the order of the AO observing that the documents submitted as evidence to prove the genuineness of the transaction are a smoke screen to cover up the true nature of the transactions as it is revealed that the purchase and sale of shares are arranged transactions to create bogus profit in the garb of LTCG by well organized network of entry providers with the sole motive to sell such entries to enable the beneficiary to account for the undisclosed income for a consideration or commission.

10. Before us, the Authorized Representative of the assessee submitted that the assessee has fi led before the AO and CIT( A) Ledger Account of the assessee in the Books of Share Broker, Statement of Affairs of the assessee for the Financial Year 2012- 13 & 2013- 14, Letter of Preferential allotment of shares by the company M/ s Danleela Investment & Trading Company limited dated 10.2012 alongwith the subscription application filed by the assessee and letter of intimation of outcome of EOGM to Bombay Stock Exchange, Letter of allotment of Bonus shares by the Company dated 15.02.2013 alongwith the certified true copy of the resolutions passed in EOGM by the shareholders of the company, Letter intimating Sub- division of Equity Shares of the company dated 15.10.2013 along with the proceedings of the AGM of the Company held on 11.09.2013, Bank Statement showing payment of purchase consideration dated 29.10.2012, Contract notes for trading in shares of M/ s Danleela Investment & Trading Company limited, Demat Statement from Pee Aar Securities Ltd. from 01.04.2012 to 20.12.2016 , indicating the movement of shares of M/ s Danleela Investment & Trading Company limited, Statement showing Volume and price movement in shares of M/ s Danleela Investment & Trading Company limited from 01.04.20012 to 31.12.2016, Bank statement showing realisation of sale proceeds of M/ s Danleela Investment & Trading Company limited during 2013- 14, Bank Statement of Share Broker, Annual Accounts of M/ s Danleela Investment & Trading Company l imited for the Financial Years 2011- 12, 2012- 13 and 2013- 14. The copies of all these documents are placed in the paper Book fi led before the Tribunal at page Nos 30 to 274. No defect in these evidences has been pointed by the AO as well the Commissioner of Income Tax ( Appeals).

11. Further, the reasons given by AO as well as the Commissioner of Income Tax ( Appeals) that increase in the share capital of M/ s Danleela Investment & Trading Company limited without any backing of the Financial Results of the company may at best give rise to suspicion which requires deeper investigation of the But suspicion alone cannot be the basis to treat the LTCG of the assessee as not genuine.

It was further argued that the AO has relied on the statement of two share Brokers namely, Sri Anil Khemka and Sri Harshvardhan Kayan who were examined by DDIT( Inv), Kolkata with whom the assessee did not have any transaction. Further, the statements of these share brokers were not made available to the assessee. Still further the assessee had asked for a cross examination of the share brokers whose statement has been used against the assessee which was not allowed to the assessee and therefore their statements cannot be read against the assessee and placed reliance on the decision of the Hon’ble Supreme court in the case of ANDAMAN TIMBER INDUSTRIES VERSUS COMMISSIONER OF CENTRAL EXCISE, KOLKATA- II reported in 2015 ( 10) TMI 442 – SUPREME COURT

12. On the other hand, the DR relied on the orders of the Lower authorities and submitted the matter may be remanded to the Assessing Officer for allowing Cross examination of the Brokers and for this he placed reliance on the decision of the Hon’ble Supreme Court in the case of ITO Vs Pirai Choodi 334 ITR 262( SC)

13. We find that the transaction of the assessee of purchase of shares of M/ s Dhanleela Investment & Trading Ltd., holding of the shares for more than one year and the sale of shares through a registered share broker in a recognized Stock Exchange and payment of Securities Transaction Tax thereon, all are supported by documentary evidences which were placed before the lower authorities. The Revenue by making enquiry in respect of the same could not point out any specific defect therein.

14. In our considered view, effect of a transaction which is supported by documentary evidences cannot be brushed aside on suspicion or probabilities without pointing out any defect therein.

15. In the instant case, the Assessing Officer himself observed that the issue of preferential shares by M/ s Dhanleela Investment & Trading Ltd. raises a suspicion. The movement in price of shares of that company was without backing of financial performance of that company.

16. In our considered view, the above at best are a pointer or cause for careful scrutiny of the transaction by the Assessing Officer but from this i t cannot be concluded that transactions were It is a matter of common knowledge that prices of shares in the share market depends upon innumerable factors and perception of the investor and not alone on the financial performance of the company.

17. In the instant case, the assessee pointed out that the financial performance of the said company improved a lot in the financial year 2012- 13 compared to financial year 2011- It was pointed out that in the financial year 2012- 13, the total Revenue of the company increased to Rs.1719 lakhs from Rs.10.25 lakhs. Further, the company witnessed a turn around and secured net profit of more than Rs.31 lakhs as compared to loss in the immediately preceding year. Thus, the business of the company increased around 171 times which shows that the Assessing Officer was not correct in stating that no business activity was conducted by the company and also incorrect in  stating  that  the  increase  in  share  price  was without any increase in financial performance of the company. Thus, we find that the transaction of the assessee was considered as sham by the Assessing Officer without proper material or analysis of the financials of the company.

18. Further, the Assessing Officer also drawn support from the investigation report of the Kolkata Investigation Wing and the statements of two share brokers, namely, Anil Khemka and Sri Harshvardhan Kayan.

19. The Departmental Representative could not controvert the submission of the assessee that the said investigation report and the statements of the share brokers were prepared or recorded at the back of the assessee and the assessee was not provided with the copy of the same and was not allowed any opportunity to cross examine the brokers. Ld. DR filed report of Assessing Officer wherein it is admitted that statement of Sh. Anil Khemka was not supplied to assessee, so where is question of allowing cross examination to the same statement. In the above circumstances, in our considered view, the said report or statement could not be used against the assessee. The decisions relied upon by the ld. Departmental Representative are not applicable to the facts of the case.

20. Even, otherwise also, we find that no reference to the transaction of the assessee could be pointed out by the Revenue which was in the said report or said Thus, the said report or statements was not in respect of specific transaction of the assessee. The assessee transacted through share broker, namely, Pee AAR Securities Ltd. and not through Shri Anil Khemka and Sri Harshvardhan Kayan.

21. Simply, because in the shares of M/ s Dhanleela Investment & Trading Ltd. some manipulation was made by few persons i t cannot be concluded that all the transactions which took place in the shares of the said company were manipulated and all the persons who transacted in the shares of the said company indulged in sham transaction. The Revenue has brought no material on record to show that the assessee actually indulged in some manipulation and paid cash in lieu of cheque received against sale of shares.

22. During the course of hearing, before us, the Departmental Representative contended that SEBI has barred dealing in shares of M/ s Dhanleela Investment & Trading Ltd. However, Authorized Representative of the assessee contended that no such ban has been imposed. The Departmental Representative in support of his contention filed copy of SEBI order dated 19.12.2014. However, a perusal of the said order, particularly para no. 32 at page 16 shows that amongst others M/ s Dhanleela Investment & Trading Co. Ltd. was prohibited till the final order from dealing in shares of Radford Global Ltd. Thus, i t is observed that the said order has not prohibited any person from dealing in shares of M/ s Dhanleela Investment & Trading Co. Ltd.

23. The assessee pleaded that substantial shares were still retained by assessee as all shares were not sold which shows bonafide of assessee that she entered into genuine Thus, principle of preponderance of probabilities will not apply to the case.

24. In the above facts and circumstances, we find that the transaction of the assessee of deriving long term capital gains of 1,69 ,12,820/- by selling shares of M/ s Dhanleela Investment & Trading Co. Ltd. was treated as bogus by the Revenue only on the basis of suspicion and probability and without finding any defect in the various documentary evidences filed by the assessee.

25. As transaction of the assessee are supported by the relevant documentary evidences, the additions made by the Assessing Officer of 1,69,12, 820/- by treating the sale transaction as bogus is unsustainable. We, therefore, delete the addition of Rs.1,69,12,820/-.

26. As we find the transaction of long term capital gains of 1,69,12,820/- derived by the assessee as genuine and correct further addition of Rs.5,07,385/- made by the Assessing Officer is also liable to be deleted and accordingly, the same is hereby deleted.

27. In the result, the appeal of the assessee is ( Order Pronounced in the Open Court on 02/ 04/ 2019)