ITAT Surat Deletes Penny-Stock Addition for Lack of Evidence Linking Assessee to Price Manipulation

Subhaschandra Patel Vs DCIT (ITAT Surat)

A Share Cannot Become “Penny Stock” Merely Because Its Price Rose – Without Assessee’s Link to Manipulation, Genuine LTCG Cannot Be Taxed u/s 68

The Surat Bench of the ITAT has held that capital gains arising from the sale of listed shares cannot be treated as unexplained cash credit u/s 68 merely because the Department has labelled the company as a penny-stock company. Where the assessee establishes the purchase, long holding, dematerialisation and sale of shares through recognised banking and stock-exchange channels, the AO must bring positive evidence connecting the assessee with the alleged price manipulation.

The assessee, Subhaschandra Patel, filed his return of income for AY 2018-19 declaring total income of ₹63,37,290. The Department received information that the assessee had booked long-term capital gain of ₹28,37,851 from the sale of shares of M/s Fiberweb India Ltd.

According to the information, Fiberweb India Ltd. was allegedly a penny-stock company whose share price had been inflated through a prearranged and artificial web of transactions. On this basis, the AO formed the view that income chargeable to tax had escaped assessment and reopened the case by issuing notice u/s 148.

In response, the assessee filed a return declaring total income of ₹63,37,580. The AO alleged that the assessee had failed to explain the market research undertaken before investing in the company and concluded that he had generated unexplained income through fraudulent practices. The sum of ₹28,37,851 was accordingly assessed as unexplained cash credit u/s 68 r.w.s. 115BBE.