ITAT Ahmedabad Quashes Penny Stock Additions Due to Lack of Evidence

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, set aside an addition of Rs 1,59,11,628 made on alleged bogus capital gains from penny stock transactions.

The ITAT ruled that the reopening of assessment and the additions made by the Assessing Officer in the absence of information that the assessee was engaged in price rigging of shares were bad in law.

The assessee had traded in the scrip of Kushal Limited, a company flagged as a penny stock company. As per the findings from SEBI and the Investigation Wing, Kushal’s scrip was found to be a penny stock. Therefore, the capital gains of Rs 1,59,11,628 earned by the assessee from the sale of stock of M/s. Kushal Tradelink Ltd were treated as unexplained credits under section 69A of the Income Tax Act, and an addition was made to the assessee’s income.

The assessee appealed before the ITAT, submitting that he is a bonafide investor and was not engaged in the manipulation of stock price. He also said that he still holds 1380 shares of Kushal Tradelink Ltd. He further said that he sold the shares when the price was falling.

The tribunal agreed with the assessee, observing that there was no direct evidence linking the assessee to any manipulation. Also, the assessee had made all transactions through a demat account and was holding a portion of the shares.

The ITAT cited Gujarat High Court rulings, which held that the reopening of an assessment merely on the basis of information available in the portal is invalid.

The tribunal held that the AO has recorded reasons on the basis of borrowed satisfaction. Additionally, neither the investigation wing report nor any other evidence available to the AO mentioned any entry, name or amount related to the assessee.

Therefore, the ITAT quashed the reassessment order, calling it unsustainable and deleted all additions made by the AO.