Nishant Parekh – Legal Heir of Mina Parekh vs ITO

Introduction

The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, delivered a significant judgment in ITA No.215/RJT/2025 for Assessment Year 2015-16, concerning the legal heir of the deceased assessee, Mina Parekh. The case, decided by Accountant Member Dr. Arjun Lal Saini on 14/10/2025, revolves around the validity of a Long Term Capital Gain (LTCG) exemption claimed under Section 10(38) of the Income Tax Act, 1961. The assessee, Nishant Parekh, appealed against the order of the National Faceless Appeal Centre (NFAC), Delhi, dated 06/02/2025, which had upheld the Assessing Officer’s (AO) addition of Rs. 3,28,81,890/- as unexplained cash credit under Section 68, taxable at 30% under Section 115BBE. The core dispute involved shares of PS IT Infrastructure & Services Ltd (formerly Parag Shilpa Investments Ltd), which the Revenue alleged were penny stock transactions. The ITAT, however, allowed the appeal, holding that the assessee had discharged the burden of proof with robust documentary evidence, and the AO’s additions were based on surmises without substantive rebuttal. This commentary provides a deep legal analysis of the judgment, emphasizing the principles of evidence, jurisdictional discipline, and the burden of proof in tax disputes.

Facts of the Case

The assessee, Mina Parekh (represented by her legal heir Nishant Parekh), filed her return for AY 2015-16 claiming an LTCG exemption of Rs. 3,12,35,919/- under Section 10(38) from the sale of shares of PS IT Infrastructure & Services Ltd. The AO, acting under Section 147 read with Section 144B, issued a reassessment order on 25/03/2022, disallowing the exemption and treating the entire sale proceeds of Rs. 3,28,81,890/- as unexplained cash credit under Section 68. The AO’s reasoning was based on the alleged modus operandi of penny stock manipulation, citing price movements and the nature of the scrip. The assessee had submitted extensive evidence during assessment proceedings, including purchase bills, bank statements, contract notes, share certificates, dematerialization records, and proof of Securities Transaction Tax (STT) payment. Despite this, the AO rejected the claim without issuing notices under Section 133(6) to verify the broker or conducting any cross-examination of the alleged hawala operators. The CIT(A) confirmed the addition, relying on the Latin maxims “minatur innocentibus qui parcit nocentibus” and “nuus commodum capere potest de injuria sua propria,” and citing various judicial pronouncements. The assessee then appealed to the ITAT, Rajkot Bench.

Reasoning of the ITAT

The ITAT’s reasoning, delivered by Dr. Arjun Lal Saini, is the most detailed and critical part of the judgment. The Tribunal meticulously analyzed the evidence and legal principles, drawing heavily from the Division Bench’s order in Ashok T. Jobanputra (ITA No.398/RJT/2023) for the same assessment year and scrip. The key points of reasoning are as follows:

1. Discharge of Burden of Proof by the Assessee:
The Tribunal noted that the assessee had submitted a comprehensive set of documents to prove the genuineness of the transactions. These included:
– Purchase bills issued by Bhushit Trading Pvt. Ltd.
– Bank statements reflecting payment for share purchases via account payee cheques.
– Physical share certificates with endorsement of transfer in the assessee’s name dated 29/11/2013.
– Dematerialization request forms and acknowledgements.
– Notices from BSE regarding the company’s name change and share sub-division.
– Bank statements showing receipt of sale proceeds.
– Global report and transaction statements for the period 01/01/2015 to 31/03/2015.

The ITAT emphasized that these were third-party evidences that satisfied all conditions under Section 10(38): shares were purchased via account payee cheque, held in demat form for over 12 months, sold through a recognized stock exchange, and STT was paid. The assessee had thus discharged the initial burden of proof under Section 68, which requires the assessee to prove the identity, creditworthiness, and genuineness of the transaction.

2. Failure of the Assessing Officer to Rebut Evidence:
The Tribunal criticized the AO for not examining the evidence properly. Specifically:
– The AO did not issue any notice under Section 133(6) to verify the broker or the company.
– No adverse statement from any other case was placed on record to show that the broker was engaged in entry operating business.
– No survey or search was conducted on the assessee or her relatives to allege price rigging.
– The AO merely stated the modus operandi of penny stock scams in the assessment order but failed to establish a “live link” between that modus operandi and the facts of the assessee’s case.

The ITAT held that the AO’s addition under Section 68 was based on “surmises and conjectures” and not on concrete evidence. The AO had not disproved any of the documents submitted by the assessee, which is a prerequisite for rejecting a claim supported by credible evidence.

3. Reliance on Jurisdictional High Court Precedents:
The Tribunal followed binding precedents from the Gujarat High Court, which has jurisdiction over the Rajkot Bench. The key cases cited were:
– Mamta Rajivkumar Agarwal (Tax Appeal No.408 of 2023, dated 11/09/2023) – where the High Court held that if the assessee provides documentary evidence of purchase, sale, and STT payment, the exemption under Section 10(38) cannot be denied without concrete rebuttal.
– Shri Ambalaxl Chimmanlal Patel (Tax Appeal No.260 of 2024, dated 15/04/2024) – reiterating the same principle.
– Champalal Gopiram Agarwal (155 taxmann.com 66) – emphasizing that the AO must examine evidence before making additions.

The ITAT also referred to the Mumbai ITAT’s decision in Abhishek Doshi (ITA No.3122/Mum/2022, dated 31/05/2023), which held that mere suspicion cannot override documentary evidence.

4. Rejection of Revenue’s Arguments:
The Revenue relied on the Kolkata High Court’s judgment in Swati Bajaj (139 taxman.com 352) and argued that fraud vitiates everything. However, the ITAT rejected this, noting that:
– The Revenue failed to prove any fraud or involvement of the assessee in price manipulation.
– The introduction of Section 56(2)(viia) (relating to taxation of shares received at undervalue) and the third proviso to Section 10(38) (requiring STT) were prospective and did not apply to the assessee’s transactions, which already complied with STT requirements.
– Judicial discipline requires adherence to jurisdictional High Court rulings, and non-jurisdictional judgments (like Swati Bajaj) cannot override Gujarat High Court precedents.

5. Application of the Principle of Consistency:
The ITAT noted that the Division Bench in Ashok T. Jobanputra had already adjudicated the same issue for the same scrip and assessment year in favor of the assessee. The Tribunal saw “no reason to take any other view” and applied the principle of consistency to avoid conflicting decisions on identical facts.

6. Conclusion on the Merits:
The ITAT concluded that the assessee had fulfilled all conditions for exemption under Section 10(38). The AO’s addition under Section 68 was unsustainable because the assessee had proven the genuineness of the transactions, and the Revenue failed to provide any rebuttal evidence. The appeal was allowed, and the addition was deleted.

Conclusion

The ITAT’s judgment in Nishant Parekh vs. ITO is a landmark ruling that reinforces the fundamental principles of tax jurisprudence: the burden of proof lies on the assessee to establish a claim, but once discharged with credible evidence, the onus shifts to the Revenue to disprove it. The Tribunal’s strict adherence to jurisdictional High Court precedents and its rejection of speculative additions based on modus operandi without factual linkage set a strong precedent for similar penny stock cases. This decision underscores the importance of documentary evidence, proper examination by the AO, and judicial discipline. For taxpayers, it provides clarity that genuine long-term capital gains from listed shares, supported by bank statements, contract notes, and STT payments, cannot be arbitrarily recharacterized as unexplained cash credits. The judgment also serves as a warning to assessing officers that additions under Section 68 must be based on concrete evidence, not assumptions.

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