ITAT Applies Test of Human Probabilities, Rejects ₹84.8 Lakh Penny Stock LTCG Claim as ‘Unnatural and Pre-Arranged’ [Read Order]

The assessee, Chitra Avdhesh Mehta, had filed her return of income for AY 2014-15 declaring Rs. 4,54,940 and claimed exemption of Rs. 84,79,100 under section 10(38) on account of LTCG from the sale of shares in Turbo Tech Engineering Ltd. and Kappac Pharma Ltd.

The Assessing Officer (AO) examined the case and found that the shares were purchased in cash and dematerialised only shortly before they were sold. The AO also observed that the shares were sold exclusively during periods of rising prices, which had no support from the companies’ financial fundamentals.

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The AO treated the LTCG claim as bogus and added the amount as unexplained cash credit under section 68.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO’s findings. The assessee approached ITAT arguing that the transactions were genuine and supported by documents such as contract notes, demat account statements, and banking records.

The assessee’s counsel further argued that the sales were carried out through a recognized stock exchange with payment of securities transaction tax, so the LTCG should be accepted as genuine.

The revenue argued that the purchases were made in cash, the dematerialisation was delayed, and the steep rise and fall in prices without any change in company fundamentals showed that the transactions were pre-arranged. The revenue also pointed out that such trading patterns were consistent with investigations into bogus LTCG schemes involving penny stocks.

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The two-member bench comprising Shri Sandeep Gosain (Judicial Member) and Shri Om Prakash Kant (Accountant Member) observed that the assessee was not a regular investor and had entered into such transactions only to claim exempt LTCG.

The tribunal observed that the price movement in the shares of these companies was commercially illogical. Applying the test of human probabilities laid down by the Supreme Court in Durga Prasad More v. CIT (1971) 82 ITR 540 and Sumati Dayal v. CIT (1995) 214 ITR 801, the tribunal held that the claim could not be accepted as genuine.

The tribunal explained that the presence of supporting documents alone could not prove genuineness when the surrounding circumstances clearly suggested otherwise. It held that the transactions were not genuine investment activities but part of a pre-arranged scheme to convert unaccounted money into exempt LTCG.

The tribunal dismissed the appeal and upheld the addition of Rs. 84,79,100 under section 68.

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