ITAT Deletes Penny Stock Addition Due to Lack of Specific Evidence Against Assessee

ITAT held that the AO’s penny-stock allegation was only based on general reports without specific evidence. As a result, it deleted the addition and allowed the assessee’s appeal.

The present appeal has been filed by Rasila Lalitkumar Cholera against the Income Tax Officer in ITAT Mumbai, challenging the order passed by CIT(A) for Assessment Year 2011-12.

The assessee filed an income tax return on July 28, 2011, declaring a total income of Rs. 470. However, later it was selected for scrutiny by the Income Tax Department after it received information that the assessee had purchased and sold shares of SVC Resources Ltd, which was suspected to be a penny stock company used for generating fake accommodation entries of long-term capital gain/short-term capital loss/business loss. Based on this information, the AO reopened the assessment under Section 147 by issuing a notice on March 31, 2018. The assessee filed objections against the reopening. However, the AO rejected them.

During the proceedings, the AO examined the share transactions. It was found that the assessee had purchased 3,200 shares on January 21, 2008, for Rs. 77,486 and sold them after three years for Rs. 615,496. The AO believed that such an increase was not genuine. Accordingly, the AO treated the sale amount of Rs. 6,15,496 as unexplained income.

The assessee then filed an appeal before the CIT(A), where the assessee argued that the transactions were genuine. The AR stated that the shares were purchased and sold via proper stock exchange mechanisms, and the payments were made through banking channels with supporting documents. AR further added that the assessee had no involvement in any price manipulation and was only a genuine investor. However, the CIT(A) rejected her appeal.

The assessee then approached the Tribunal. During the hearing, AR argued that all documentary evidence proving the genuineness of the transactions had been submitted and that the Department had not produced any material to show the assessee’s involvement in any wrongdoing. The department relied on the orders of the lower authorities.

After considering the facts, the Tribunal said that the AO had relied on general investigation reports, labelling the company as a penny stock, but had not brought any specific evidence against the assessee to show her involvement in price manipulation or accommodation entries.

The Tribunal further added that the additions made by the AO were not sustainable in law because they were based on assumptions and general reports rather than strong evidence against the assessee. As a result, the Tribunal directed the AO to delete the additions and allowed the assessee’s appeal.