ITAT Deletes Section 68 Addition on LTCG from Penny Stocks for Lack of Direct Evidence:

The assessee is Rajesh Gupta HUF who fled its return for AY 2016-17 declaring total income of Rs.18,91,590. During scrutiny, the AO examined the assessee’s transactions in securities. The assessee had declared long-term capital gains from the sale of shares of Alpaya Creations Ltd. (now known as EINS Edutech Ltd.) and Kalpa Commercial Ltd.

The assessee had purchased 10,000 shares of Alpaya Creations Ltd. for Rs.7,75,284, which, after subdivision and bonus issue, increased to 7,75,284 shares and were subsequently sold for Rs.3,34,24,911. Similarly, 10,000 shares of Kalpa Commercial Ltd. were purchased for Rs.5 lakh and sold for Rs.32,71,624. The shares were held for more than one year and the assessee claimed exemption of the resulting LTCG under Section 10(38) of the Income Tax Act.

The AO treated the shares as penny stocks on the basis of the Investigation Wing report and material relating to SEBI proceedings. He consequently treated the sale consideration as unexplained cash credit and made an addition of Rs.3,66,98,115 under Section 68 of the Act. The CIT(A) upheld the addition, following which the assessee approached the Tribunal.

Before the Tribunal, the assessee submitted that the transactions were genuine and supported by documentary evidence, including purchase bills, sale bills, bank statements showing payment of purchase consideration and receipt of sale proceeds, physical share certificates, and demat account statements. The Tribunal observed that the assessee had furnished substantial documentary evidence establishing the purchase and sale of the shares. The shares were purchased through banking channels, dematerialised, held for more than one year and subsequently sold through the recognised stock exchange, with the sale consideration received through banking channels.

The Tribunal further noted that the statements relied upon by the Revenue did not name the assessee as a beneficiary of any alleged bogus LTCG arrangement. There was also no direct material demonstrating that the assessee had paid cash to any broker, buyer or entry provider for obtaining accommodation entries. The Tribunal held that the assessee had successfully discharged the burden cast upon it under Section 68 by producing documentary evidence establishing the genuineness of the share transactions. The lower authorities had failed to rebut this evidence and had instead relied principally upon the Investigation Wing report, which did not implicate the assessee.

Accordingly, the Tribunal deleted the additions made by the AO towards the sale consideration of shares of Alpaya Creations Ltd. and Kalpa Commercial Ltd. and allowed all the grounds raised by the assessee.