Penny Stock LTCG Addition Remanded for Fresh CIT(A) Hearing: ITAT

Jay Patel Vs ITO (ITAT Raipur)

Penny-Stock Addition Requires Independent Appellate Examination: CIT(A) Directed to Make Enquiry and Give Findings

Background of the Case

Late Shri Rajendra Kumar Patel filed his return for AY 2015–16 on 31 March 2016, declaring income of ₹5,80,750. He also claimed long-term capital gains of ₹8,61,760 as exempt under section 10(38) from the sale of 3,300 shares of Mahavir Advanced Remedies Ltd.

The shares had been purchased on 4 July 2013 for ₹29,865 through a cash transaction and sold on 20 November 2014, with the recorded sale consideration being ₹8,93,768.

The assessee died on 11 September 2021. His son, Jay Patel, intimated the Department about the death on 15 March 2022.

An earlier reassessment completed on 28 March 2022 was challenged in appeal. By an order dated 13 February 2024, the Raipur Tribunal declared that assessment null and void and directed the Assessing Officer to comply with section 159(2) by duly notifying the legal representative and passing a fresh assessment in accordance with law.

Fresh Assessment Against the Legal Heir

Following the earlier Tribunal order and the section 148A procedure, a fresh notice under section 148 was issued on 31 December 2024 to Jay Patel as legal heir.

The Assessing Officer sought details of the share transactions, the source of investment and an explanation for the sharp increase in the share price.

The legal heir furnished a written submission dated 8 March 2025, enclosing the demat account, broker trading and ledger details, purchase and sale bills and investment particulars.

According to the assessment record, no justification for the steep price rise was provided, and the subsequent show-cause notice dated 11 March 2025 remained unanswered.

Assessing Officer’s Case Against the Transaction

The Assessing Officer relied on the Investigation Directorate’s findings concerning an organised arrangement for generating bogus exempt capital gains through manipulated penny stocks.

He considered the transaction suspicious because the shares had been purchased off-market in cash at a nominal price and sold about sixteen months later for approximately thirty times the purchase cost.

The company’s financial position was considered insufficient to justify the price movement. The deceased assessee was also not a regular share trader.

The Assessing Officer referred to Smt. M.K. Rajeshwari v. ITO, [2018] 99 taxmann.com 339 (Bangalore Tribunal), involving the same scrip, and treated the entire sale consideration of ₹8,93,768 as unexplained income.

The fresh assessment was completed on 28 March 2025. Penalty proceedings under section 271(1)(c) were initiated separately.

CIT(A)’s Reasoning

The CIT(A) confirmed the addition, relying on the cash purchase, the substantial unexplained price increase, the company’s financial position and decisions concerning penny-stock transactions.

He referred to Sumati Dayal v. CIT and CIT v. Durga Prasad More, concerning examination of surrounding circumstances and human probabilities. Reliance was also placed on Suman Poddar, Udit Kalra and Sanjay Bimalchand Jain.

The CIT(A) considered that the demat statement, broker ledger, bills and bank statement established the mechanics of the transaction but did not adequately answer the allegations concerning its genuineness.

He also clarified that the assessment operated against Jay Patel in his representative capacity under section 159, in respect of the deceased’s income.

Tribunal’s Decision

The Tribunal held that the CIT(A) had summarily relied on the Assessing Officer’s findings without undertaking the required enquiry or providing adequate independent reasoning.

It found the appellate disposal deficient with reference to sections 250(4) and 250(6) and the standards expected of a quasi-judicial authority.

Accordingly, the Tribunal set aside the CIT(A)’s order and restored the appeal for de novo adjudication, specifically directing enquiry and findings consistent with those provisions and the principles of natural justice.

The legal heir was also directed to comply with hearing notices and present the matter on merits.

The appeal was allowed for statistical purposes. The Tribunal did not delete the addition or finally accept the section 10(38) exemption claim.

Author’s Comments

An appellate authority must examine the dispute independently; reproducing the assessment’s conclusions cannot substitute for evaluating the evidence and objections. The remand requires that exercise to be undertaken afresh.

However, the order should be reported with care. The reproduced CIT(A) findings contain factual observations and references to several decisions. Despite this, the Tribunal considered the enquiry and reasoning inadequate. The ruling therefore does not establish that the mere presence of citations makes an appellate order sufficient—or that every order confirming a penny-stock addition lacks reasons.

The substantive controversy remains open. Transaction documents must be examined alongside the investigation material, with a clear assessment of their connection to the particular assessee and transaction. Neither documentary form nor suspicion alone should replace that examination.

The legal-heir aspect is also limited. This decision does not invalidate the fresh assessment merely because it concerns a deceased taxpayer. The operative relief addresses the quality of appellate adjudication, following the earlier direction to proceed through the legal representative.

The assessee has secured a fresh hearing, not a finding that the capital gains were genuine. That opportunity must now be supported by a focused response to the material relied upon and the specific circumstances surrounding the share transaction.

Cases Discussed

• Smt. M.K. Rajeshwari v. ITO, [2018] 99 taxmann.com 339 (ITAT Bangalore), order dated 12.10.2018 — Relied upon by the Assessing Officer and CIT(A) in relation to alleged penny-stock transactions involving Mahavir Advanced Remedies Ltd.
• Suman Poddar v. ITO, ITA No. 841/2019 (Delhi High Court); SLP dismissal reported at [2019] 112 taxmann.com 330 (Supreme Court) — Cited by the CIT(A) concerning the evidentiary assessment of extraordinary gains from alleged penny-stock transactions.
• Udit Kalra v. ITO, ITA No. 220/2019 (Delhi High Court) — Cited regarding suspicious share-price movements and examination of the genuineness of long-term capital gains.
• Sanjay Bimalchand Jain (L/H Shantidevi Bimalchand Jain) v. PCIT, [2018] 89 taxmann.com 196 (Bombay High Court) — Relied upon concerning penny-stock gains and unexplained increases in share value in proceedings involving a legal heir.
• CIT v. Sanghamitra Bharali, (2014) 361 ITR 481 (Gauhati High Court) — Referred to in the Assessing Officer’s reasoning concerning the evaluation of allegedly unexplained transactions.
• Sumati Dayal v. CIT, (1995) 214 ITR 801; [1995] 80 Taxman 89 (Supreme Court) — Relied upon by the CIT(A) for applying the test of human probabilities to disputed transactions.
• CIT v. Durga Prasad More, (1971) 82 ITR 540 (Supreme Court) — Relied upon for examining surrounding circumstances and the real nature of transactions rather than accepting documents solely at face value.
• Jay Patel, Legal Heir of Late Rajendra Kumar Patel v. ITO, ITA No. 04/RPR/2024, order dated 13.02.2024 (ITAT Raipur) — Earlier proceedings in which the reassessment was set aside and directions were issued for fresh assessment after compliance with Section 159(2).

FULL TEXT OF THE ORDER OF ITAT RAIPUR

The present appeal preferred by the assessee emanates from the order of the Ld.CIT(Appeals)/NFAC, Delhi dated 20.07.2026 for the assessment year 2015-16 as per the grounds of appeal on record.

2. Brief facts in this case are as follows:

“2.1 Late Shri Rajendra Kumar Patel filed his return for A.Y. 2015-16 on 31.03.2016 declaring income of Rs.5,80,750 and claiming long-term capital gain of Rs.8,61,760 on the sale of 3,300 shares of M/s Mahavir Advanced Remedies Ltd. as exempt u/s 10(38) (shares purchased on 04.07.2013 for Rs. 29,865 — the purchase having been made in cash — and sold on 20.11.2014 at Rs.272.20 per share). He expired on 11.09.2021, which was intimated to the Department on 15.03.2022 by his son, the present appellant.

2.2 An earlier reassessment for this year, completed u/s 147 r.w.s. 144B on 28.03.2022, was carried in appeal; the then Commissioner (Appeals) dismissed the appeal on 07.11.2023, but the Hon’ble ITAT, Raipur Bench (ITA No. 04/RPR/2024, order dated 13.02.2024) set aside that assessment as null and void and directed the Assessing Officer to comply with section 159(2) by duly notifying the legal representative of the deceased and to pass a fresh assessment in accordance with law.

2.3 In compliance, and after following the procedure of section 148A, notice u/s 148 was issued on 31.12.2024 with the prior approval of the specified authority u/s 151, to Shri Jay Patel as legal heir of the deceased. Notices u/s 142(1) dated 21.02.2025 and 06.03.2025 called for the share-transaction details, source of investment, and justification of the steep price rise. The appellant furnished a written submission (08.03.2025) with the demat account (Bahubali Financial Services Pvt. Ltd.), trading/ledger details (Shri Venkatesh Stock Broker Services India Pvt. Ltd.), purchase and sale bills and investment details, but offered no justification for the steep price rise. The show-cause notice dated 11.03.2025 went unreplied.

2.4 The Assessing Officer, drawing on the countrywide investigation of the Directorate of Investigation, Kolkata into the organised racket of bogus exempt LTCG through rigged penny scrips — off-market/cash purchases at nominal prices, price ramping through circular low-volume trades by operator-controlled entities, and exit sales to the operator’s paper companies against the beneficiary’s own unaccounted cash — found the transaction to be a sham: the scrip’s financials could not support the abrupt price movement; the deceased was not a regular share trader; the purchase was off-market in cash; the same scrip stood examined and the assessee’s appeal dismissed in M.K. Rajeshwari (ITAT Bangalore, 12.10.2018); and reliance was placed on CIT v. Sanghamitra Bharali (361 ITR 481) (Gauhati). The entire sale consideration of Rs.8,93,768 was treated as unexplained income, and the assessment was completed u/s 147 r.w.s. 144 on 28.03.2025:

Penalty u/s. 271(1)(c) was initiated separately. Demand of Rs.9,25,010 was raised u/s. 156.

3. In this backdrop, the Ld. CIT(Appeals)/NFAC has held and observed as follows:

“4.4 Ground 2 (first and second limbs)-the merits. The admitted facts speak for themselves:3,300 shares of an obscure scrip with meagre financials were acquired off market in cash for Rs.29,865 in July 2013 and sold within about sixteen months for Rs.8,93,768-a rise of about thirty times-by a person who was not otherwise a share trader; no justification for the price movement was offered despite specific opportunity; and the very scrip, M/s Mahavir Advanced Remedies Ltd., for the very F.Y. 2014-15, has been held to be a rigged penny stock and the exemption claim rejected in Smt. M.K. Rajeshwari v. ITO [2018] 99 taxmann.com 339 (Bangalore – Trib.). The apparent must be tested against the surrounding circumstances and human probabilities, and self-serving documents cannot compel acceptance of the unreal: Sumati Dayal v. CIT [1995] 80 Taxman 89 (SC); CIT v. Durga Prasad More [1971] 82 ITR 540 (SC). Astronomical, unexplained price growth in such scrips justifies the addition notwithstanding demat/contract-note paperwork: Suman Poddar v. ITO (Delhi High Court, ITA No. 841/2019), SLP dismissed in Suman Poddar v. ITO [2019] 112 taxmann.com 330 (SC); Udit Kalra v. ITO (Delhi ‘High Court, ITA No. 220/2019). On facts near-identical — including the assessment in the hands of a legal heir — the Hon’ble Bombay High Court sustained the addition where penny-stock shares bought at a nominal price were sold within a year at a huge premium and the assessee could not explain the rise: Sanjay Bimalchand Jain (L/H Shantidevi Bimalchand Jain) v. PCIT [2018] 89 taxmann.com 196 (Bombay).

4.5 The documents relied upon — demat statement, broker ledger, bills, bank statement — establish only the mechanics of the exit through the exchange; that is the very design of the scheme, and paperwork of this kind was present in every one of the decisions cited above. What remains unexplained is what mattered: the cash purchase (itself outside the banking channel), the thirty-fold rise of a worthless scrip, and the source of the funds that re-entered as ‘sale consideration’. The plea that the deceased had ‘declared’ the gains does not assist — a claim of exemption u/s 10(38) is not an offer to tax, and the addition does not tax anything twice: the returned income of Rs.5,80,750 was not disturbed, and only the unexplained credit of Rs.8,93,768 was brought to tax. The onus under section 68 lay on the assessee and has not been discharged. The addition of Rs.8,93,768 is confirmed. Ground 2 is dismissed.

4.6 Ground 3, against the initiation of penalty u/s 271(1)(c), is premature; penalty proceedings are independent and will be decided on their own merits. The ground is disposed of accordingly. Ground 4 is general.

4.7 It is recorded that in Form No. 35 (item 12) the appellant has stated that no evidence other than that produced before the Income-tax Authority has been filed; the documents annexed to the appeal (demat statement, broker ledger, purchase/sale bills, net obligation bill, transaction statement, bank statement and the replies) were all furnished to the Assessing Officer with the submission dated 08.03.2025 or in the earlier round, and have in any event been considered above on merits.

5. CONCLUSION

5.1 In the result, the appeal is DISMISSED. The addition of Rs.8,93,768 is confirmed and the assessed income of Rs.8,93,770 (rounded u/s 288A) is upheld, with the clarification in para 4.2 that the assessment operates against the appellant his representative capacity u/s.159 in respect of the income of Late Shri Rajendra Kumar Patel. Interest is consequential. The penalty proceedings u/s.271(1)(c) shall proceed independently in accordance with law.”

4. That as discernable from the findings of the Ld. CIT(Appeals)/NFAC, the said authority had summarily relied on the findings of the A.O in the assessment order and upheld the additions without complying with the provisions of Section 250(4) & (6) of the Income Tax Act, 1961 (for short ‘the Act’). That there is no enquiry by the First Appellate Authority and that there is no reasoning provided for arriving at his decision which therefore contrary to the principle of functioning of a quasi-judicial authority.

5. In view thereof, the order of the Ld. CIT(Appeals)/NFAC is set aside and matter is remanded back to his file for denovo adjudication with a specific enquiry and findings in terms with Section 250(4) & (6) of the Act while complying with the principles of natural justice. At the same time, it is directed that the assessee shall duly comply with the hearing notices from the Ld.CIT(Appeals)/NFAC and represent the matter on merits.

6. In the result, appeal of the assessee is allowed for statistical purposes.

Order pronounced in open court on 12th day of October, 2026.