AO can’t make addition on his speculation and assumption of manipulation in share prices

Addition quashed as alleged manipulation in share prices was merely a speculation and assumption of Assessing Office

In a recent judgment, Hon’ble Rajasthan High Court has quashed addition made on account of bogus and dubious share transaction observing that shares have been manipulated was merely a speculation and assumption of assessing office

ABCAUS Case Law Citation:
4904 (2025) (12) abcaus.in HC

In the instant case, the Income Tax Department had challenged the order passed by Income-Tax Appellate Tribunal (ITAT) deleting addition made by the AO u/s 68 of the Income Tax Act 1961 (the Act).

A search was made under Section 132 of the Act at the business/residential premises   of the assessee as also his family members and business concerns. The search revealed several incriminating documents along with cash, jewellery and other valuables, which were seized. Jurisdiction was assumed by Principal Commissioner of Income-tax (PCIT) and notice under Section 153A of the Act was issued.

The assesseee had claimed exempt income in his ITR as long term capital gain from   transaction on which Security Transaction Tax (STT) was paid.

The Income-tax Officer/AO called upon assessee to furnish details of purchase of shares of the particular company resulting in entire amount of capital gain from sale of 11400 shares. These shares were sold by assessee within the gap of two- three years from the date of purchases resulting in large amount of long term capital gain 

The assessing officer was of the view that finances of the company were not good enough to have such a high rise in share price and based on his own research that   the share price of the company had been manipulated by the syndicate of entry   providers to reach such high without any financial basis.

According to assessing officer, the said company was also suspended thrice by Bombay Stock Exchange (BSE) and therefore transaction could not be called as   genuine, though it had been conducted through stock exchange.

The assessing officer, therefore, proceeded to conclude that entire LTCG was by   indulging in bogus and dubious share transaction used to convert his undisclosed income in the garb of long terms capital gain. The Assessing officer treated the entire gain as unexplained cash credit under provisions of Section 68 of the Act.

Thereafter, the assessing officer initiated penalty proceedings and concluded that the assessee had furnished inaccurate particulars of income by showing his undisclosed income in the garb of long term capital gain and accordingly imposed penalty under   Section 271(1)(c) of the Act.

In first appeal, the CIT(A) dismissed the appeal but in second appeal the ITAT allowed the appeal by the impugned order.

The Hon’ble High Court noted that the fact that shares were purchased and sold through BSE was admitted.  There was nothing in assessment order to indicate that it was assessee who manipulated stock price. There was also no finding that assessee   purchased shares knowing well that it was going to be rigged or manipulated. The fact that shares had been held to had been manipulated itself was a speculation and an assumption of assessing officer.

The Hon’ble High Court observed that the assessment order had been passed under Section 153(A) read with Section 143(3) of the Act. In this context the Hon’ble Supreme Court has held that in case no incriminating material is unearthed during the   search, the AO cannot assess or reassess taking into consideration any other material     in respect of completed assessment/unabated assessment. It means that in respect   of completed/unabated assessment, no addition can be made by AO in absence of any incriminating material found during the course of search under Section 132 or requisitioned under Section 132A of the Act.

The Hon’ble High Court opined that in the instant case, the AO had made the addition   treating the long term capital gain as undisclosed income merely on the basis of information that he had received from the Investigation Wing. Addition made was neither based on any incriminating material found during the course of search nor based on any other evidence, but it was merely because of hypothetical presumption of the AO.

The Hon’ble High Court held the ITAT on factual finding was correct in concluding that   addition made by AO had to be deleted.

Accordingly, the Hon’ble High Court dismissed the appeal of the Revenue holding that no substantial question of law was involved in the appeal.

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