Income Tax Dept Fails to Establish Nexus Between Alleged Penny Stock Scam and Taxpayer: ITAT sets aside LTCG Addition [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench struck down the income taxaddition made under Long Term Capital Gain (LTCG) as the department failed to establish a nexus between the alleged penny stock price rigging and the taxpayer or his broker.

The taxpayer/assessee, Suresh Kumar Jain claimed exemption under LTCG from the sale of shares in M/s. Kappac Pharma Ltd. The taxpayer had initially bought these shares at a nominal price, converted them into a dematerialized format, and later sold them through official banking channels, realizing a substantial profit.

The Assessing Officer (AO) rejected this transaction as entirely bogus simply because the company was labeled a "penny stock." To support this, the AO relied on general reports from the Kolkata Investigation Wing detailing how penny stock scams operate.

Without conducting any specific inquiry into the taxpayer's actual trades, the AO used Section 69A to classify the sale proceeds as unexplained, taxable income. When the assessee appealed the matter before the Commissioner of Income Tax (Appeals) [CIT(A)], the commissioner deleted the addition. Thus, the department filed the appeal before the appellate bench.

The Tribunal noted that while the AO extensively discussed the generic mechanics of penny stock manipulation such as price rigging and accommodation entries there was an absolute lack of evidence tying the taxpayer to these fraudulent activities. However, the assessment order never even alleged that the taxpayer's specific transactions were pre-arranged, fictitious, or collusive.

Conversely, the bench of Vikas Awasthy (Judicial member) noted that the taxpayer met the primary burden of proving the transaction's legitimacy by providing comprehensive documentary evidence. This included contract notes, demat account statements, and banking records that clearly traced the purchase and sale of the shares.

These documents proved that the trades were conducted through recognized stock exchanges and supported by a verifiable financial trail. Since the department failed to present any contradictory material to challenge this documentation, the Tribunal concluded that the genuineness of the transaction was established.

The appellate tribunal pointed out that the Revenue did not bring forward any new evidence to challenge the Commissioner's conclusions. Accordingly, the bench upheld the CIT(A)’s decision to delete the LTCG addition and dismissed the appeal brought by the Revenue.

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