Mumbai ITAT: Mere Penny Stock Tag Cannot Override Documentary Proof in Sunrise Asia Share Deal

Background of the Dispute

The appeal before the ITAT Mumbai in the case of Jignesh H Shah Vs DCIT arose from reassessment proceedings for Assessment Year 2014-15. The controversy centred around long-term capital gains earned by the assessee from the sale of listed equity shares of Sunrise Asia Limited and the subsequent denial of exemption under Section 10(38) of the Income Tax Act 1961.

The assessee had reported long-term capital gains amounting to ₹68,41,479 on the sale of shares of Sunrise Asia Limited and claimed the same as exempt under Section 10(38) on the ground that:

  • The shares were listed
  • The sale was executed through a recognised stock exchange
  • Securities Transaction Tax (STT) had been duly paid

The Assessing Officer (AO), however, rejected the claim by labelling the scrip as a “penny stock” and treating the gains as accommodation entries. Consequently:

  • An addition of ₹68,41,479 was made under Section 68 as unexplained cash credit
  • A further addition of ₹2,73,660 was made under Section 69C as alleged commission expenditure (estimated at 4% of the gains)

On appeal, the NFAC / CIT(A) sustained the additions. The assessee then carried the matter to the ITAT Mumbai.

Grounds Raised in Appeal

Among the grounds taken by the assessee, the following were material to the final decision:

  1. The reassessment under Section 147 and notice under Section 148 were challenged as being based on “borrowed satisfaction” without independent application of mind.
  2. It was alleged that assessment under Section 143(3) read with Section 147 was completed without providing:
    • Underlying material or investigation reports relied upon by the AO
    • Any opportunity to cross-examine third-party witnesses
      Reference was placed on Kishanchand Chellaram v. CIT (1980) 125 ITR 713 and Andaman Timber Industries v. Commissioner of Central Excise (Civil Appeal No. 4228 of 2006).
  3. The assessee contested the treatment of the sale of Sunrise Asia Limited shares as bogus and the consequent addition of ₹68,41,479 under Section 68.
  4. The denial of exemption under Section 10(38) on the sale of listed shares through a recognised stock exchange was assailed as being based purely on presumption and suspicion.
  5. The estimated commission addition of ₹2,73,660 under Section 69C was argued to be unfounded.

For purposes of adjudication, the Tribunal chose to first address Grounds 3, 4, and 5, which directly concerned the additions under Section 68 and Section 69C, as these were interlinked.

Factual Matrix: Purchase, Amalgamation and Sale of Shares

Initial Acquisition of Shares

The Tribunal carefully reviewed the documents and noted the following factual sequence:

  1. The assessee had acquired 5,000 shares of Sunrise Asia Limited through the broker M/s Santoshima Leasing Finance and Investment (India) Limited.

    • Purchase consideration was ₹1,00,000
    • Rate was ₹20 per share
    • Payment was made via account-payee cheque
    • Shares were credited directly into the assessee’s demat account in dematerialised form

  2. The assessee had earlier purchased 11,000 shares of M/s Santoshima Leasing Finance and Investment (India) Limited on 24.05.2011 and 27.05.2011 through the broker M/s Mihir Consultancy and Trading Private Limited:

    • These were originally acquired in physical form
    • The shares were later dematerialised and transferred into the assessee’s demat account

Corporate Restructuring: Amalgamation

Subsequently, M/s Santoshima Leasing Finance and Investment (India) Limited underwent amalgamation with Sunrise Asia Limited. As a result of this scheme of amalgamation:

  • The assessee received 10,960 shares of Sunrise Asia Limited in lieu of the shares held in the amalgamating company.
  • Thus, the assessee came to hold Sunrise Asia Limited shares both by direct purchase and via share swap on amalgamation.

Sale of Sunrise Asia Shares and Capital Gains

The record revealed two stages of sale:

  1. **March 2013 (AY 2013-14)😗*
    • The assessee sold 1,900 shares of Sunrise Asia Limited
    • Aggregate sale consideration amounted to ₹8,50,158