ITAT Quashes Reassessment Based on ‘Borrowed Satisfaction’, Grants Relief in Rs 1.59 Crore Penny Stock Case

The ITAT Ahmedabad held that an assessment reopening based on general information rather than independent verification is unjustified and invalid as per the law. The tribunal allowed Bhupesh Sajjansinh Rathod’s appeal by setting aside the additions made by the Income Tax Department.

The assessee declared its total income of Rs 6,416,450 for the Assessment Year 2018-19, in which it showed Rs 4,351,087 as Long Term Capital Gains (LTCG) and Rs 6,327,563 as Short Term Capital Gains (STCG), earned from trading in shares of Kushal Tradelink Limited.

During the assessment of the return, the tax authorities treated these gains as “penny stock” and made the entire sale consideration of Rs 1.59 crore an addition to the assessee’s income on the grounds of unexplained income under Section 69A. An additional Rs 7.95 lakh was added as alleged commission, along with a small interest income mismatch.

However, the assessee claimed that he was not engaged in any fake share trading; all transactions were genuine, carried out using a demat account and supported with all relevant documents or records. Further claimed that the shares were purchased by the assessee out of a loan taken of Rs 50 lakh based on market knowledge during the Financial Year 2015-16, and that no unaccounted investment was made.

When the tribunal analysed the facts of the case, it noted that despite investigation reports indicating price manipulation in the Kushal Group, there was no solid evidence linking the assessee to any wrongdoing. His name did not appear in any seized documents or beneficiary lists. The reopening was based on general information rather than independent verification, which is unfair as per the law.

The tribunal cited earlier Gujarat High Court decisions, based on a similar issue, all held that reopening based on “borrowed satisfaction” without direct evidence is not permissible under the law. It also ruled that additions made without concrete or solid proof, including commission estimates, cannot be sustained. In conclusion to the aforementioned findings, the tribunal held that the reassessment was invalid and deleted all additions. The assessee’s appeal was fully allowed.