Smt. Chitra Avdhesh Mehta Vs ITO (ITAT Mumbai)
The case before the Income Tax Appellate Tribunal (ITAT) Mumbai in Smt. Chitra Avdhesh Mehta vs. ITO concerned the tax treatment of long-term capital gains (LTCG) claimed as exempt under Section 10(38) of the Income Tax Act, 1961, arising from the sale of shares alleged to be “penny stocks.”
Background
The assessee, an individual, filed her return of income for Assessment Year (AY) 2014-15 declaring ₹4,54,940 as total income, along with an exemption claim of ₹84,79,100 under Section 10(38) for LTCG on listed securities. The case was selected for scrutiny under CASS. The Assessing Officer (AO) issued notices under Sections 143(2) and 142(1), noting large capital gains from the sale of shares of Turbotech Engineering Ltd. and Kappac Pharma Ltd..
The AO observed that:
- All 500 shares of Turbotech Engineering Ltd. were sold between 20.06.2013 and 08.07.2013 during a price rise, with no sales during the subsequent fall.
- All 9,000 shares of Kappac Pharma Ltd. were sold between 24.02.2014 and 28.03.2014, again during an upward trend, avoiding later declines.
- Shares were allegedly purchased in cash in 2011 and 2012 but were dematerialised only in 2013, raising doubts about the genuineness of acquisition dates.
The AO concluded that the transactions were not genuine investment activities but part of a pre-arranged scheme involving circular trading to convert unaccounted money into tax-exempt income. The amount of ₹84,79,100 was treated as unexplained cash credit under Section 68 and added to the assessee’s income, which was assessed at ₹89,34,040.
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition.
Arguments before the ITAT
The assessee relied on the ITAT decision in Farzad Sheriar vs. ITO (ITA No. 2065/Mum/23), where similar penny stock gains were held genuine in the absence of evidence linking the assessee to price rigging or accommodation entries. In that case, the Tribunal noted that although the scrip exhibited penny stock characteristics, transactions were routed through demat accounts, payments made via banking channels, and no SEBI report implicated the assessee. The Bombay High Court in Pr. CIT v. Ziauddin A. Siddique (ITA No. 2012 of 2017) had similarly upheld ITAT’s deletion of additions where there was no material showing the assessee’s involvement in manipulation.
The assessee also cited Pr. CIT v. Smt. Krishna Devi (Delhi High Court, ITA 125/2020), where additions were deleted because the AO’s conclusions rested largely on financial analysis of the scrip and investigation wing reports, without cogent evidence connecting the assessee to alleged bogus LTCG schemes. In that case, the court held that suspicion, even if strong, cannot substitute for proof.
The Revenue argued that the AO’s findings were consistent with decisions such as Manvi Khandelwal and Arihant Kumar Jain, where similar gains were treated as non-genuine based on the abnormal price rise and lack of fundamental justification. It was emphasised that mere routing through banks and stock exchanges does not validate suspicious transactions. Reliance was placed on Sumati Dayal v. CIT (1995) 80 Taxman 89 (SC), which allows determination of the true nature of transactions based on surrounding circumstances and human probabilities.
Tribunal’s Findings
The Tribunal evaluated:
