ITAT Confirms Penny Stock LTCG as Bogus: Rs. 11.97 Lakh Added under Section 68

The assessee claimed exemption under Section 10(38) for long-term capital gains from the sale of 5,000 Kappac Pharma Ltd. shares. These shares were bought in April 2012 for Rs. 100,000 in cash, dematerialised in October 2013, and sold in November 2014 through a SEBI-registered broker for Rs. 12,97,725. To support the claim, the assessee submitted purchase bills, demat statements, contract notes, and bank statements. However, the AO considered the transaction false and not genuine, citing investigation reports on penny stock operators, the rapid price increase of the stock, cash purchase via off-market transfer, delayed dematerialisation, and irregular trading patterns. Based on the likelihood of human behaviour, the AO concluded that the transaction was a device to convert unaccounted income into exempt capital gains.

The CIT(A) upheld this addition, referencing judicial cases involving Kappac Pharma, such as Udit Kalra v. ITO and Manvi Khandelwal v. ITO, which found similar gains to be illegitimate. The Tribunal agreed, noting the case differed from Parasben Kochar v. ITO on factual grounds, and dismissed the appeal.

Main Issue: Whether the long-term capital gain from the sale of shares of Kappac Pharma Ltd., supported by documents but involving suspicious price movement and cash purchase, could be treated as genuine and exempt under Section 10 (38) or taxed as unexplained cash credit under Section 68.

ITAT’s Decision: The Tribunal upheld the the AO and CIT (A)’s decision that the transaction was part of a pre-arranged accommodation entry scheme. The assessee failed to explain the transaction and cash purchase, lack of regular trading history, substantial delay in dematerialisation, and extraordinary price rise through normal market factors.

The tribunal gave a reasoning that the supporting documents did not outweigh the surrounding circumstances and the AO’s reliance on the test of human probabilities. Following the binding precedents on Kappac Pharma cases, the LTCG claim was rejected, and the addition of Rs. 11,97,725/- under Section 68 was confirmed. Therefore, the appeal was dismissed.

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