Delhi ITAT Upholds Deletion of Penny Stock Additions; Mere Suspicion and Investigation Reports Cannot Replace Evidence

ITO Vs Ritu Jain (ITAT Delhi)

Delhi ITAT Upholds Deletion of Penny Stock Additions; Mere Suspicion and Investigation Reports Cannot Replace Evidence

The Delhi Bench of the ITAT, in ITO v. Ritu Jain (AY 2013-14), upheld the deletion of additions made in respect of alleged bogus long-term capital gains (LTCG) from penny stock transactions, reiterating that mere suspicion, abnormal price rise or Investigation Wing reports cannot substitute cogent evidence establishing that the transactions were sham.

The assessee had earned exempt LTCG of ₹49.99 lakh on sale of shares of Mahanivesh India Ltd. The Assessing Officer treated the entire sale consideration of ₹50.45 lakh as unexplained money under section 69A read with section 115BBE and further made an addition of ₹1.01 lakh under section 69C towards alleged commission paid for obtaining accommodation entries. The additions were based primarily on information received from the Investigation Wing alleging manipulation in penny stock transactions.

Before the Tribunal, the assessee also raised legal grounds under Rule 27, contending that the reassessment notice under section 148 was barred by limitation under the amended provisions of section 149. The Tribunal accepted these legal grounds, holding that the notice issued under section 148 was time-barred, both because it was issued beyond the prescribed limitation period and because the alleged escaped income was less than ₹50 lakh, making the extended limitation under section 149(1)(b) inapplicable. Consequently, the reassessment itself was held to be without jurisdiction.

On merits as well, the Tribunal found no infirmity in the order of the CIT(A), who had relied upon the Delhi High Court decisions in PCIT v. Krishna Devi, PCIT v. Karuna Garg, and Vipin Jain. The Tribunal reiterated that preponderance of probabilities or abnormal appreciation in share prices cannot by themselves justify additions, particularly where the Revenue fails to produce direct evidence showing that the assessee introduced unaccounted money or received accommodation entries. It noted that the transactions were supported by documentary evidence, banking channels and demat records, while the Investigation Wing’s report remained uncorroborated insofar as the assessee was concerned.

Accordingly, the Tribunal upheld the deletion of the additions under sections 69A and 69C, dismissed the Revenue’s appeal and affirmed that tax additions based merely on suspicion or generalized investigation reports cannot survive in the absence of cogent evidence linking the assessee to the alleged accommodation entry racket.

Cases Discussed

• PCIT v. Karuna Garg (Delhi High Court), [2022] SCC OnLine Del 4079
• PCIT v. Krishna Devi (Delhi High Court), [2021] SCC OnLine Del 563
• UOI vs. Rajeev Bansal
• UOI vs. Ashish Agarwal
• NTPC vs. CIT (Supreme Court of India), (1998) 229 ITR 383
• Vipin Jain

FULL TEXT OF THE ORDER OF ITAT DELHI

This is appeal filed by the revenue against the order of Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 04/11/2025 for Assessment Year 2013-14.

2. The revenue has raised the following grounds of appeal:

1. That on facts of case and in law, the Ld. CIT(A) erred in relying upon judicial precedents in the cases of PCIT vs. Smt. Krishna Devi, PCIT vs. Karuna Garg and Vipin Jain ignoring the fact that Special Leave Petitions (SLPs) against these judgements are already pending before the Hon’ble Supreme Court, and therefore is issue is sub judice.

2. That the order of Ld. CIT(A) is contrary to law and facts and deserves to be set aside, and the order of the AO dated 19.5.2023 passed u/s. 147 r.w.s. 144B of the Act deserves to be restored.

3. The above grounds are independent and without prejudice to one another.

4. That the appellant craves the right to add, delete amend or abandon any of the grounds at the time of or before the actual hearing of the case.

5. That on the facts of the case and in law, the Ld. CIT(A) erred in deleting the additions made by the AO u/s. 69A and 69C r.w.s. 115BBE of the Income Tax Act, 1961 amounting to Rs. 51,45,886/- without appreciating that the assessee had failed to discharge the onus of proving the genuineness of the transactions relating to penny stock scrip Mahanivesh india Limited.

6. That on facts of the case and in law, Ld. CIT(A) erred in deleting the addition of Rs. 50,44,986/- made u/s. 69A without appreciating the fact that the shares of M/s Mahanivesh (India) Ltd. were purchased at nominal price of Rs. 1 each and sold at an average price of Rs. 507.86 i.e. 507.86 times whereas company had poor financial credentials and future income prospects at the time of investment made by the assessee.

7. That on facts of case and in law, the Ld. CIT(A) erred in not appreciating the fact that beneficiary holds these shares for the mandatory lock in period of one year and share prices are rigged by the operator through circular trading among themselves to an abnormally high level, even 500 to 1000 times.

8. That on facts of the case and in law, the Ld. CIT(A) failed to appreciate that the AO had made additions after detailed analysis of information received from the Investigation Wing, which categorically established that the transactions is penny stock scrips were accommodation entries and not genuine investments.

9. That on facts of the case and in law, Ld. CIT(A) erred in holding that additions cannot be sustained without cogent evidence, whereas the AO had brought on record sufficient material and analysis to demonstrate that the assessees claim of Long Term Capital Gain (LTCG) was not genuine.

10. That on facts of case and in law, Ld. CIT(A) erred in deleting the additions mechanically by relying on precedents without independently appreciating the facts of the assessee’s case, which clearly established that the assessee had claimed exempt LTCG of Rs. 50,44,986/- without any credible evidence.

3. The brief facts of the case are that the assessee is an individual and filed her return on 23.3.2014 declaring total income of Rs. 2,53,340/- after deduction under Chapter VI­A. During the year under consideration, the assessee is found to be involved in trading of the penny stock scrip Mahanivesh India Limited while being involved in trades resulting in a trade value / sale value of Rs. 50,44,986/-. In the ITR filed u/s. 148 the assessee has shown LTCG of Rs. 49,99,851/- as exempt income in Schedule EI. The total income u/s. 148 has been declared of Rs. 2,53,340/- after deduction under Chapter VI-A. The LTCG which is shown from the sale of penny scripts of Mahanivesh India Limited being in the nature of the accommodation entry and not a genuine share transaction as evident from the Report and information available on record. AO noted that assessee is found to be owner of the money which has not furnished satisfactory explanation regarding the nature and source of money and failed to prove the genuineness of transactions with Mahanivesh India Limited, therefore, due to non-verification of genuineness of these transactions of sale of shares of Mahanivesh India Limited, the amount of Rs. 50,44,986/- is being treated as unexplained money u/s. 69A r.w.s. 115BBE of the Act thus the same was added to the total income of the assessee. AO further noted that since the assessee has failed to substantiate her claim of the genuineness of the transaction of sale of shares of Mahanivesh India Limited. The sale consideration of Rs. 50,44,986/- has been taken by the assessee in the form of accommodation entries. The commission expenditure was estimated @2% of total sale consideration of shares of Rs. 50,44,986/- which comes to Rs. 1,00,900/-. As the assessee has not explained the source of these expenditure incurred by her in taking these accommodation entries in her return. Thus, AO further added the unexplained commission expenditure amounting to Rs. 1,00,900/- to the total income of the assessee and assessed the total income at Rs. 53,99,226/-.

4. In first appeal, the Ld. CIT(A) deleted the additions made by the AO in the case of the present assessee namely Ritu Jain, by respectfully following its order in the case of Vipin Jain for the assessment year 2015-16.

5. Ld. Sr. DR vehemently supported the order of the Assessing Officer and reiterated the contentions raised in the grounds of appeal.

6. On the other hand, Ld. AR of the assessee relied upon the order of the Ld. CIT(A).

7. During the hearing, Ld. AR filed an application u/r 27 of the ITAT Rules, 1963 and raised the following legal grounds:-

1) On the facts and circumstances of the case and in law, the notice issued under section 148 of the Income Tax Act, 1961 after 1.4.2021 for AY 2013-14 is barred by limitation under the provisions of section 149 of the Act substituted by the Finance Act, 2021 and, consequently, the reassessment proceedings and reassessment order framed pursuant thereto are void ab initio and liable to be quashed.

2) On the facts and circumstances of the case and in law, the alleged income escaping assessment on account of long term capital gain from sale of shares amounts to Rs. 49,99,851/- and the total sale consideration amounts to Rs. 50,44,986/-. Since the income escaping assessment is admittedly less than Rs. 50,00,000/-, the extended period of limitation beyond three years under section 149(1)(b) of the Act is not attracted and, therefore, the notice issued under section 148 after expiry of three years from the end of the relevant assessment year is without jurisdiction, barred by limitation and liable to be quashed.”

8. After perusing the aforesaid legal grounds and after hearing both the sides, in view of the decision of the Hon’ble Supreme Court decision in the case of NTPC vs. CIT (1998) 229 ITR 383, we are of the view that the aforesaid grounds are legal and goes to the root of the matter and all the material facts necessary for the adjudication of the aforesaid legal grounds are on record, thus the same are admitted.

9. As regards legal ground no. 1 is concerned, it is noted that the assessment year under consideration is AY 2013-14 and the original notice u/s. 148 of the Act was issued on 9.6.2021, which in terms of judgement of the Hon’ble Supreme Court in UOI vs. Ashish Agarwal and UOI vs. Rajeev Bansal is deemed to be a notice issued under section 148A(b) of the Act. On the date of issuance of the original notice, only 21 days of limitation remained available upto 30.6.2021. Subsequently, the AO issued a notice under section 148A(b) on 27.5.2022, to which the assessee furnished its reply on 7.6.2022. Accordingly, the last date of issue of notice under section 148 expired on 28.6.2022, however, the impugned notice u/s. 148 was issued only on 19.7.2022 i.e. after expiry of the limitation period prescribed under section 149 of the Act. Thus, the notice u/s. 148 is time barred and its consequent assessment is not valid, hence, the notice as well as assessment are hereby quashed on this count.

10. As far as second legal ground is concerned, it is noted that the notice u/s. 148 is also barred by limitation as the alleged income escaping assessment is less than Rs. 50 Lacs and therefore, the extended period under section 149(1)(b) is inapplicable, resultantly, the notice issued u/s. 148 after the expiry of three years from the end of the relevant assessment year is without jurisdiction, barred by limitation and liable to be quashed alongwith all consequential proceedings. We hold and direct accordingly.

11. In so far as merits of the case is concerned, we have heard the rival contentions and perused the records. We find that Ld. CIT(A) has deleted the additions in dispute by observing as under:-

“(A). Upon appeal, the ITAT ruled in favor of the assessee. Subsequently, the Revenue filed appeals before the High Court. However, the High Court dismissed the appeals, citing insufficient evidence to support the Revenue claim of fictitious LTCG. The Court emphasized the requirement for concrete evidence in tax assessments and highlighted the lack of substantial proof provided by the Revenue. Therefore, the High Court upheld the ITAT decision, ruling that no substantial question of law was raised in the appeals.

The decision of Hon’ble HC is reproduced here.

It is seen from the facts of the present case that it was the astronomical increase in the price of the shares purchased by the respondent-assessee which has, inter alia led to the additions in the income for the concerned AY under Section 68 of the Act. Admittedly, the purchase and sale of shares and the source of credit therein is not in doubt at all. In fact, the concerned amounts have been considered to be added by the AO on account of preponderance of probabilities and human behaviour.

13. A perusal of the impugned order of the ITAT would indicate that the additions in question have also been based on the statement of a person namely, Mr. Bikash Surekha. However, the ITAT has concluded that the said statement neither has any direct or indirect connection with the respondent-assessee nor does the same mentions that his entities have provided accommodation entries in the Company. In any case, it is also discernible from the said order that no opportunity of hearing was extended to the respondent-assessee at any relevant point of time to cross-examine the person in question if any claim adverse to the interests of the respondent- assessee was made.

14. The ITAT order further records that there was no material which could signify that either the Company was suspended, or its shares were barred from trading or the price of the scrip of company was manipulated for the purpose of providing accommodation entry. It has been held by the ITAT that purchases made in the earlier years regarding the shares also remained undisputed and the exhaustive fist containing the concerned individuals or companies indulged in malpractices pertaining to LTCG, which has been heavily relied upon by the Revenue, does not mention the given transaction of the respondent-assessee. Notably, it is seen from the impugned order that the AO has failed to corroborate its conclusions on the basis of any cogent material available on record before forming an opinion that the sale transaction was sham and a pre planned arrangement to claim exemption under the guise of LTCG.

15. An upshot of the above findings of the ITAT, coupled with the fact that no irregularity was highlighted by the Securities and Exchange Board of India pertaining to the transaction of the scrips of the Company, would lead us to the conclusion that there is nothing adverse against the respondent-assessee which could establish a fictitious LTCG to claim exemption at the behest of the respondent-assessee. Rather, the arguments put forth by the Revenue are mere findings of fact.

16. In any case, the issues raised by the Revenue in the present appeals already stand covered by the decision of this Court in the case of PCIT v. Krishna Devi [2021 SCC OnLine Del 563], wherein, under similar facts and circumstances, it was held that the preponderance of probabilities cannot be a ground to reject the evidence put forth by the parties. The relevant paragraphs of the said decision read as under:

“11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under Section 10(38), in a pre-planned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income Tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent’s unaccounted money, but he did not dig deeper. Notices issued under Sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that “There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de- mat account and the consideration has been received through banking channels.” The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.

12. Mr. Hossain’s submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent. With regard to the claim that observations made by the CIT(A) were in conflict with the Impugned Order, we may only note that the said observations are general in nature and later in the order, the CIT(A) itself notes that the broker did not respond to the notices. Be that as it may, the CIT(A) has only approved the order of the AO, following the same reasoning, and relying upon the report of the Investigation Wing. Lastly, reliance placed by the Revenue on Suman Poddar v. ITO (supra) and Sumati Dayal v. CIT (supra) is of no assistance. Upon examining the judgment of Suman Poddar (supra) at length, we find that the decision therein was arrived at in fight of the peculiar facts and circumstances demonstrated before the ITAT and the Court, such as, inter alia, lack of evidence produced by the Assessee therein to show actual sale of shares in that case. On such basis, the ITAT had returned the finding of fact against the Assessee, holding that the genuineness of share transaction was not established by him. However, this is quite different from the factual matrix at hand. Similarly, the case of Sumati Dayal v. CIT (supra) too turns on its own specific facts. The above-stated cases, thus, are of no assistance to the case sought to be canvassed by the Revenue.

13. The learned ITAT, being the last fact-finding authority, on the basis of the evidence brought on record, has rightly come to the conclusion that the lower tax authorities are not able to sustain the addition without any cogent material on record. We thus find no perversity in the Impugned Order.” [Emphasis supplied]

17. The view taken in the case of Smt. Krishna Devi (supra) was subsequently followed in another decision of this Court in PCIT v. Karuna Garg [2022 SCO OnLine Del 4079].

18. In view of the aforesaid, we find that the present appeals do not raise any substantial question of law.

19. Consequently, we do not find any reason to interfere with the decision of the ITAT and thus, the appeals stand dismissed.

Following the decision of hon HC in the case of VIPIN Jain for the AY 2015-16, the addition proposed by the AO in the case of assese Ritu Jain is also deleted.

2.1 In the result the appeal is allowed.”

12. In the background of the aforesaid findings, we find Ld. CIT(A) has discussed the findings of the Hon’ble High Court in the case of PCIT vs. Krishna Devi [2021] SCC Online Del 563 wherein, on similar facts and circumstances, it was held that the preponderance of probabilities cannot be a ground to reject the evidence put forth by the parties. We further note that Ld. CIT(A) also observed that view taken in the case of PCIT vs. Krishna Devi (Supra) was subsequently followed in another decision of the Hon’ble High Court in the case of PCIT vs,. Karuna Garg [2002 SCC Online Del 4079]. We do not find any infirmity in the findings of the Ld. CIT(A), as the issues involved in the instant case are squarely covered by the decision of the Hon’ble High Court in the case of Vipin Jain for the AY 2015-16, thus, Ld. CIT(A) by following the said decision has rightly deleted the additions in the hands of the assessee-Ritu Jain, which does not need any interference on our part, hence, we uphold the same and reject the grounds raised by the revenue.

13. In the result, Revenue’s Appeal is dismissed.

Order pronounced in the Open Court on 17-7-2026.