The Income Tax Appellate Tribunal (ITAT), Hyderabad bench has recently held that the income tax department cannot make disallowance merely on the ground that the assessee invested in penny stock in a case where the assessee had no intention to make nay gain out of such sale and purchase of shares.
In the present case, the assessee has made the investment in the shares of Rockon Fintech, a penny stock company in the year 2008-09. The assesseeclaimed that it could not have known that Rockon Fintech is a penny stock company in the year of purchase of shares. It was further contended that the assessee has been engaged in the trading of shares of a number of companies andRockon Fintech is not only one company whose shares the assessee has traded in.
However, the department rejected all these contentions and made an addition of Rs.36,18,484/- towards the unexplained investment in share trading and Rs.70,120/- by making a disallowance of deduction u/s 80C of the Act. The order was subsequently confirmed by the first appellate authority.
While considering the second appeal by the assessee, Judicial Member Ms. Madhavi Devi found that the argument of the assessee that the assessee could not have known that Rockon Fintech is a penny stock company in the year of purchase of shares is quite acceptable.
“Further, it is also seen that the assessee has sold all of his shares and has incurred a loss of Rs.506/- on the sale of shares of M/s. Rockon Fintech while short-term capital gain of Rs.20,770/- was admitted in the I.T. return of the assessee along with other income. Thus, according to him, even if there has to be any disallowance, it can be of Rs.506/- only and not the entire value of the purchase of shares of the said company at Rs.2,35,644/-. I am convinced with the argument of the assessee that the shares were purchased as long as back in the year 2008 and sold immediately thereafter and the assessee has incurred a loss and only such amount can be disallowed,” the Tribunal said.
While concluding the matter in favor of the assessee, the Tribunal held that “from the details filed by the assessee before this Tribunal, it appears, that the assessee has used the sale consideration (after the sale of other shares) for purchase of shares of Rockon Fintech and immediately thereafter, on sale of the said shares, the assessee has utilized the said sale consideration for the purchase of other shares. Further, the assessee has not made any gain from the sale of those shares, nor has he claimed any exemption u/s 10(38) of the Act. Therefore, I am convinced that the intention of the assessee was not to make any gain out of the purchase and sale of shares of the penny stock company. Thus, no disallowance can be made, leave alone the disallowance of the value of shares invested.”
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