ITAT Deletes Penny Stock Addition as Assessee Had Claimed Short-Term Capital Loss

The assessee filed the return of income for assessment year 2012-13 declaring Rs 6.05 lakh as total income but the Investigating Directorate, Mumbai, provided the information that the assessee is a beneficiary of trading penny stock transactions through M/s Scan Steels Ltd during 2011-12 and the assessment was reopened. The assessee submitted contract notes, demat records and payment statements of Securities Transaction Tax, arguing that the shares were purchased through the Bombay Stock Exchange (BSE) and resulted in Short-Term Capital Loss of Rs 1.38 lakh.

The AO claimed that the assessee had obtained Long-term Capital Gain through these penny stock transactions and made an addition of unexplained cash of Rs 3.02 lakh under Section 68 of the Income Tax Act and further added Rs 11.78 thousand under Section 69C towards alleged commission paid for obtaining accommodation entries. The CIT (A) upheld both the addition made by the AO and held that the transaction lacked commercial substance.

The ITAT examined all the evidence on record and found out that the AO erroneously proceeded on the assumption that the assessee claimed an exempt Long-Term Capital Gain of Rs 3.92 lakh but the evidence showed that the assessee had rather claimed a Short-Term Capital Loss supported by contract notes and banking records but no material was submitted by the AO to establish his claim and no independent inquiry was conducted.

Accordingly, ITAT held that additions under Section 68 can not be sustained merely on the basis of presumptions without any direct and documented material linking the assessee to the alleged arrangement. The Tribunal held both the additions under Sections 68 and 69C as unsustainable and deleted them. The Appeal of the assessee was allowed.