ITAT Jodhpur: Penny Stock LTCG Cannot Be Treated as Bogus Merely on General Investigation Report

The Income Tax Appellate Tribunal (ITAT) in Jodhpur has ruled that long-term capital gains (LTCG) from penny stock transactions cannot be deemed bogus simply because the shares were part of a general investigation report. The tribunal found that the Assessing Officer (AO) had not presented specific evidence linking the assessee to any wrongdoing. The transactions were conducted through banking channels, supported by demat records, and the shares were regularly traded, leading the ITAT to allow the assessee's appeal.

Facts of the Case

The assessee had purchased 6,250 equity shares of Maa Jagdambe Tradelinks Ltd., earlier known as Parasrampuria Credit and Investment Ltd., from Dolex Commercial Pvt. Ltd. on 26 February 2013 for ₹1,25,000. The shares were credited to his demat account on 7 August 2013.

During the relevant year, the assessee sold the shares for ₹29,79,412 and declared long-term capital gain of ₹28,54,412, while claiming exemption under Section 10(38).

The Assessing Officer, relying primarily on an Investigation Wing report concerning alleged accommodation entries through penny stocks, treated the capital gain as non-genuine and made an addition of ₹28,52,412 under Section 68. The AO also estimated commission at 5% of the profit and made a further addition of ₹1,48,970 under Section 69C. The assessee's objections were rejected by the First Appellate Authority.

ITAT's Findings

ITAT observed that the Investigation Wing report relied upon by the AO was general in nature and did not establish that the assessee's name appeared in the investigation or that he had been involved in any illegal or irregular activity.

The Tribunal noted that:

• The assessee was regularly engaged in investment activities in shares.
• The shares of Maa Jagdambe Tradelinks Ltd. were regularly traded on the stock exchange.
• Both the purchase and sale transactions were conducted through banking channels.
• The AO had not conducted any independent inquiry with the stock exchange or with the purchaser and seller by issuing notices under Section 133(6).

According to the Tribunal, in the absence of any adverse material directly implicating the assessee in wrongdoing, an addition could not be sustained merely on the basis of presumptions and surmises.

The Tribunal also noted that coordinate benches, while considering identical matters involving the same scrip and assessment year, had held that gains/losses arising from transactions in Maa Jagdambe Tradelinks Ltd. could not be treated as non-genuine or bogus.

Final Decision

After considering the facts and applicable precedents, ITAT held that the additions made by the Assessing Officer were unsustainable and directed the AO to delete the addition.

Accordingly, the assessee's appeal was allowed.

Key Takeaway

The ruling highlights that an assessee's share transaction cannot be treated as bogus merely because the concerned scrip has been identified in a general Investigation Wing report relating to penny stocks. There must be specific and credible material connecting the assessee with the alleged accommodation entry or wrongdoing.

Where purchase and sale transactions are supported by documentary evidence, routed through banking channels and reflected in the demat account, an addition under Section 68 cannot be sustained merely on general allegations, presumptions or surmises, in the absence of an independent inquiry or adverse evidence against the assessee.

This AI-generated summary is for informational purposes only. Please view attached original judgment for the complete text and authoritative interpretation.