The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) nullified income tax additions in a penny stock deal for quick gains.
The assessee’s return of income was assessed at ₹13,49,630/- under section 143(1) of the Income-tax Act. Subsequently, scrutiny under CASS led to notices (sections 143(2) and 142(1)).
The individual, a partner in three firms, reported various incomes. During assessment, the Assessing Officer flagged a ₹82,52,616/- exempt income claim from Long Term Capital Gain on selling 7550 “Kappac Pharma” shares. The officer suspected pre-arranged transactions, citing a Kolkata Directorate of Investigation report on schemes generating bogus entries for tax-exempt gains.
Financial scrutiny of “Kappac Pharma” revealed incongruities in stock performance, profit, and related indicators from 2009 to 2013. The counsel for the Respondent Ujjawal Kumar Chavan (ITO) observed that the assesse had declared a huge profit in this script, suggesting pre-arranged transactions. Chavan relied on the report of the Directorate of Investigation, Kolkata, to expose the organized racket generating bogus entries for tax-exempt long-term capital gains.
After reproducing the sale of shares by the assesse in the open market, the tribunal considered the transactions non-genuine, citing SEBI’s findings that such penny stock cases involved rigged transactions to convert black money into white money. The tribunal deemed it undisclosed income liable to be added under the heading “Income from other sources.”
Counsel for the assesse, Rahul Sarda, conveyed that the assesse disposed of 7550 shares of KPL, securing Long-Term Capital Gain exemption under section 10(38) of the Act. Sarda emphasized the documentary evidence provided, including contract notes, information about issued cheques, and bank statements supporting the sale proceeds realization.
The assesse’s legal counsel argued that the Long-Term Capital Gain was authentic, refuting tax authorities’ allegations, and highlighted the credibility of the evidence presented. The tribunal held that the assesse was an unsuspecting investor in the transaction, and the assessing officer applied presumptions without material against the assesse.
The two-member bench comprising Narendra Kumar Choudhry (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that though characteristics of penny stock existed, the department didn’t provide materials linking the assesse to dubious transactions related to entry, price rigging, or exit providers.
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