ITAT Deletes Penny Stock Additions Backed Only by Suspicion:

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted additions made under Sections 68 and 69C of the Income Tax Act in the hands of a Mauritius-based Foreign Portfolio Investor (FPI), holding that transactions in shares of International Conveyors Ltd. could not be treated as accommodation entries merely on the basis of a generalised investigation report. A bench comprising Judicial Member Beena Pillai and Accountant Member Bijayananda Pruseth allowed the appeal filed by India Max Investment Fund Limited for AY 2019-20.

The dispute arose after the Revenue reopened the assessment based on information received from the Investigation Wing, alleging that International Conveyors Ltd. was a penny stock used for generating bogus long-term capital gains and accommodation entries. The Assessing Officer treated an amount of Rs 1.68 crore as unexplained cash credit under Section 68 and further made an addition of Rs 8.43 lakh under Section 69C towards alleged commission expenditure for obtaining accommodation entries.

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The assessee contended that it was a Mauritius-resident company registered as an FPI with SEBI and had been investing in Indian securities since 2006. It is submitted that the shares of International Conveyors Ltd. were acquired through a recognised stock exchange in October and November 2010 and were sold through the stock exchange mechanism in August 2018 after being held for more than eight years. The assessee furnished contract notes, Demat statements, custodian reports and banking records to substantiate the transactions.

The Tribunal noted that the purchase and sale transactions were fully supported by contemporaneous documentary evidence and that the Revenue had not disputed the genuineness of the records produced by the assessee. “The shares of International Conveyors Ltd. were acquired through the normal stock exchange mechanism at the market prices prevailing on the respective dates of purchase.”

The Bench observed that the Assessing Officer had primarily relied upon generalized findings contained in the investigation report without bringing any material on record to establish a nexus between the assessee and any alleged accommodation entry operators. It further noted that no evidence was produced to show that the assessee participated in any price manipulation arrangement or routed its own unaccounted money through the impugned transactions.

The Tribunal also took note of the financial position of International Conveyors Ltd. and observed that the company possessed substantial assets, generated significant revenue, earned profits and carried on genuine business operations. Accordingly, it found no basis for treating the company as a mere shell entity or penny stock solely on the strength of allegations in the investigation report. “Mere suspicion, however strong, cannot take the place of evidence.”

Holding that the Revenue had failed to produce any cogent material demonstrating that the transactions were sham or lacked commercial substance, the Tribunal deleted the addition of Rs 1.68 crore made under Section 68. Since the addition under Section 69C was merely consequential to the alleged accommodation entry transaction, the same was also deleted. Thus, the appeal filed by the assessee was allowed.

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