ITAT Quashes Section 69 Addition on Alleged Penny Stock Transactions

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted additions made in a penny stock case, holding that where the assessee had already offered the gains from share transactions to tax as short-term capital gains, and the transactions were supported by banking records, the entire sale consideration could not again be treated as unexplained income under Section 69.

The assessee, an individual, had filed her return for AY 2017-18 declaring income from interest and capital gains. Based on information received from the Investigation Wing, the assessment was reopened on the allegation that she had traded in shares of the Kushal Group, a penny stock entity allegedly used for generating accommodation entries in the guise of capital gains and losses. The Assessing Officer treated the sale proceeds of Rs 13.39 lakh as unexplained income under Section 69 and further added Rs 26,780 as alleged commission expenditure under Section 69C.

Before the Tribunal, the assessee contended that she had never claimed exemption under Section 10(38) and had already offered the gains arising from the impugned transactions to tax as short-term capital gains. The transactions were executed through recognised channels, supported by demat records, contract notes and bank statements, and there was no evidence linking her with any alleged market operators.

The Tribunal noted that it was an undisputed fact that the assessee had not claimed any exempt long-term capital gain benefit and had voluntarily offered the gains from the sale of shares to tax. It further observed that the purchase and sale transactions had been carried out through regular banking channels and the Revenue had failed to bring any material on record showing that the funds used for the transactions represented unaccounted money.

The Bench found that the assessment order contained no evidence demonstrating the assessee’s involvement in rigging the share prices of the Kushal Group or any connection with the alleged operators said to have manipulated the scrip. Apart from relying on a general investigation report and the alleged modus operandi of penny stock operators, the Assessing Officer had conducted no independent enquiry to establish that the assessee was a beneficiary of accommodation entries.

According to the Tribunal, suspicion and general allegations cannot replace evidence. Since the gains from the transactions had already been assessed under the head “Capital Gains,” the entire sale consideration could not be taxed again under Section 69 in the absence of cogent material proving that the transactions were sham or fictitious. The addition was therefore based merely on surmises and conjectures.

Thus, the Tribunal deleted the addition of Rs.13.39 lakh made under Section 69. Since the primary addition itself did not survive, the consequential addition of Rs.26,780 towards alleged commission expenditure under Section 69C was also deleted. The Tribunal kept the assessee’s legal grounds challenging the reopening under Section 148 open and allowed the appeal partly.

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