Penny Stock Transactions Found Genuine: ITAT Deletes ₹1 Cr Addition Relying on SEBI Report and Sister Case Precedent [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted additions under Sections 68 and 69C in a case involving penny stock transactions and held that the shares of Splash Media were purchased and sold legitimately on the Bombay Stock Exchange (BSE) through a SEBI-registered broker.

Asha Himmat Bhadra (assessee) purchased 2,500 shares of Splash Media for Rs. 3,27,496 through Alliance Finstock Ltd., a SEBI-registered broker, via BSE’s electronic platform. Payment was made via cheque, cleared on August 18, 2009, and shares were delivered to her demat account with Axis Bank.

The company issued bonus shares in a 3:1 ratio, increasing her holding to 10,000 shares. A subsequent 10:1 stock split on August 2, 2010, resulted in 1,00,000 shares of Rs. 1 each.

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The assessee sold these 1,00,000 shares between December 2010 and January 2011 on BSE for Rs. 1,00,13,050, receiving proceeds in her Axis Bank account. Sale bills and contract notes from the broker were provided.

The Assessing Officer (AO) treated the sales as bogus penny stock transactions based on information from the Investigation Wing labeling Splash Media as a penny stock, adding the sale proceeds under Section 68 as unexplained credits and 3% commission under Section 69C as unexplained expenditure.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the additions. Aggrieved by the CIT(A)’s order, the assessee appealed to the ITAT.

The assessee’s counsel argued that the transactions were genuine, conducted on BSE with STT paid, and supported by broker bills, bank statements, and demat records. Reliance was placed on the SEBI investigation report, which found no manipulation in Splash Media’s share prices or violations of SEBI regulations after analyzing trading volumes and patterns.

The two-member bench comprising Sandeep Gosain (Judicial Member) and Prabhash Shankar (Accountant Member) observed that the SEBI report, requested by the Income Tax Department, confirmed no adverse findings on price rigging or manipulative patterns in the scrip.

The bench noted the transactions were executed on a recognized stock exchange, beyond the assessee’s control. It relied on the precedent in the assessee’s sister’s case, Varshaben Laherikant Bhadra vs. ITO, where similar additions for the same scrip and assessment year were deleted.

The bench held that the AO’s reliance on the Investigation Wing’s information was insufficient without independent verification, especially given SEBI’s clearance. It directed the AO to delete the additions under Sections 68 and 69C. The appeal of the assessee was allowed.

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