Genuineness of Penny Stocks Share Sale: ITAT Upholds ₹21.72 Lakh Addition as Sham Transaction [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT )upheld the addition of ₹21.72 lakh, treating the sale of Karma ISP penny stock shares as a sham transaction.

Krutik Ashokkumar Parikh,appellant-assessee, had originally declared an income of Rs. 1,90,780/-. The Assessing Officer (AO) reopened the assessment under section 147 after receiving information that the HUF had traded in a penny stock, Karma ISP. The assessee did not submit a revised return in response to the notice.

During reassessment, the AO noted that the assessee sold 7,800 shares of Karma ISP for Rs. 21,72,300/-, which were originally purchased for Rs. 1,76,670/-. Although the assessee claimed the gains as exempt long-term capital gains under section 10(38), the AO concluded that the transactions were not genuine, as Karma ISP was a known penny stock often used to convert unaccounted funds into tax-exempt income.

As the assessee failed to respond to the notice under section 148 or provide any submissions during the proceedings, the AO added Rs. 21,72,300/- to the income under best judgment assessment.

The assessee told the Commissioner of Income Tax (Appeals)[CIT(A)] that it had replied to the show-cause notice and submitted all required documents, and that the assessment under section 144 was not justified. It said the transaction was genuine, done through recognized stock exchanges with STT paid, and eligible for exemption under section 10(38). The assessee also provided additional evidence, which the AO checked in the remand report.

The AO noted that the assessee had not filed a return in response to the section 148 notice. He also pointed out that the 1118% gain from a single scrip in 15-16 months had no commercial justification, and Karma ISP was identified as a penny stock used to create fake exempt gains.

The CIT(A) agreed with the AO, noting the unusual high returns, lack of further trading, and suspicious nature of the scrip, which the assessee could not prove as genuine. The addition of Rs. 21,72,300/- was upheld, and the assessee appealed against this order.

The two member bench comprising Dr.BRR Kumar (Vice President) and Siddhartha Nautiyal (Judicial Member) reviewed the case and noted several issues with the transaction. The assessee bought Karma ISP shares in April 2010 but paid for them almost eleven months later without any explanation. Karma ISP was known from investigations as a penny stock often used to generate fake long-term capital gains.

The assessee earned over 1,100% gain in 15-16 months from a single share, with no prior or later trading, and the company had no real business or financial reason to justify such a rise in share price.

The appellate tribunal applied the principle of commercial prudence and human probabilities, as supported by Supreme Court rulings, and found that the transaction lacked credibility. The long delay in payment, extreme gains, absence of business rationale, and isolated nature of the trade indicated it was aimed at tax avoidance.

The tribunal held that the CIT(A) rightly upheld the AO’s conclusion that the transaction was sham, and the addition of ₹21,72,300/- under section 68 was justified, as the assessee failed to prove the transaction was genuine.

Accordingly the appeal was dismissed.

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