ITAT sets aside additions on Penny Stock gains, directs deletion of Related Expenses due to Lack of Evidence [Read Order]

In a recent ruling, the Mumbai bench of the  Income Tax Appellate Tribunal ( ITAT ) set aside the additions made on penny stock gains and related expenses due to lack of evidence on the part of the assessing officer ( AO ) to prove that the transactions entered by the assessee were manipulative.

In this case, the assessing officer observed a long-term capital gain of Rs. 79.7 lakhs declared by the assessee on the sale of shares of M/s. Tuni Textiles Limited and claimed exemption under Section 10( 38 ) of the Income Tax Act, 1961 for the assessment year 2013-14.

The assessee,  Hiren D. Kubadia HUF, purchased 5000 shares on 28-03-2011 from the stock exchange through a registered SEBI broker. Due to a split in the face value of the shares, the holding increased from 5,000 shares to 50,000 shares.

All the above-mentioned shares were sold by the assessee between June to November for an aggregate sale value of Rs. 91,18,672, which resulted in a long-term capital gain of Rs. 78,67,422. 

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The AO relied on the report of the investigation wing from Kolkata, which indicated that certain operators manipulated share prices of companies labelled as “penny stocks,” including Tuni Textiles Ltd. The report highlighted that the company’s weak fundamentals did not justify its inflated market value, and some operators admitted to providing bogus long-term capital gains through accommodation entries. 

Although the assessee submitted before the AO that the transactions were genuine and furnished documents regarding the purchase and sale of shares, the AO disbelieved the claim of long-term capital gains.

The AO passed the assessment order by adding that the entire sale consideration of Rs. 91.27 lakh was added as unexplained cash credit under Section 68 of teh Income Tax Act. An additional sum of Rs. 2.73 lakh was estimated as commission expense under Section 69C of the act , on the assumption that the assessee incurred costs to facilitate the purported bogus transactions.

The assessee appealed before the Commissioner of Income Tax ( Appeals ) [ CIT( A ) ]. Both the additions were upheld by the CIT( A ).

It was contended by the assessee’s counsel that the transactions of the assessee should not have been doubted merely on the basis of generalized report given by the Investigation Wing, and no fault was recognized by the AO with the evidence furnished by the assessee. It further observed that the AO did not bring any evidence to prove that the assessee was involved in the manipulated transactions.

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The bench observed that the assessing officer completely relied on the report, which was a generalized report about share price manipulation and bogus capital gains.

The bench further noted that the AO could not draw any adverse conclusions from the replies submitted by the assessee and that the AO failed to establish any link between the assessee and the reports of the investigation wing.

The bench directed the AO to delete the addition of both  the sale proceeds of shares made and and the estimated commission expenses.

The ITAT, comprising of  Sunil Kumar Singh ( Judicial Member ) and B. R. Baskaran ( Accountant Member ) allowed the appeal filed by the assessee and set aside the impugned order passed by the CIT( A ).

To Read the full text of the Order CLICK HERE

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