Mere Inclusion of Scrip in ‘Penny Stock’ List without Material Evidence of Price Manipulation Not Justify Addition: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that mere inclusion of a company’s shares in an investigation report as a “penny stock”, without material evidence is not sufficient to justify addition under Section68 of Income Tax Act, 1961.

Dilip Bhanverlal Dangi (HUF) filed an appeal. For Assessment Year 2014-15, the assessee declared income of ₹1.72 lakh and claimed exemption under Section 10(38) amounting to ₹19.41 lakh on LTCG arising from sale of shares of Radford Global Ltd.

The fact is that the assessee had purchased shares of Rosette Resorts Ltd. at ₹10 per share in 2011, which were later subdivided and the company’s name subsequently changed to Radford Global Ltd.

After the sale of the shares after holding them for over one year, the gains were claimed as exemption.

The Assessing Officer, based on information from the Investigation Wing and SEBI findings, alleging that the scrip was part of a penny stock racket used to generate bogus LTCG, rejected the exemption claim and treated the entire sale consideration as unexplained cash credit under Section 68.

The officer held that the transaction to be non-genuine and part of an accommodation entry scheme. The CIT(A) upheld the addition.

The assessee submitted that all transactions were executed through the online trading platform of the BSE via a registered broker, reflected in the demat account, and supported by contract notes, demat statements, broker confirmations, and bank records.

The payments for purchase and sale proceeds were routed through proper banking channels. Also, neither the assessee nor the broker was named in any SEBI order or investigation report as being involved in price rigging, submitted the assessee before the tribunal.

The appellate tribunal observed that “Mere inclusion of a scrip in an investigation report as a penny stock, in the absence of any material demonstrating the Assessee’s involvement in price manipulation or accommodation entry arrangements, is insufficient to justify an addition.”

The bench of Beena Pillai (Judicial member) noted that the revenue failed to rebut the evidentiary value of the documents produced by the assessee or to demonstrate that the impugned transactions were non-genuine.

Accordingly, the bench deleted the addition under Section 68 stating ‘unsustainable.’

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