ITAT Upholds Addition for Bogus LTCG from Penny Stocks

ITAT Ahmedabad order on addition u/s 68 Based on information from the Investigation Wing about bogus LTCG from penny stock scrips in the case of Gitaben Dineshbhai Patel Vs ITO

The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, dismissed the appeal filed by Gitaben Dineshbhai Patel, upholding the addition of Rs. 93.92 lakh as unexplained income under Section 68 of the Income Tax Act for the Assessment Year 2017–18, relating to alleged bogus Long-Term Capital Gains (LTCG) claimed as exempt under Section 10(38). The case was reopened by the Assessing Officer (AO) under Section 147 based on specific inputs from the Investigation Wing regarding price manipulation in the shares of Kushal Tradelink Ltd. (a penny stock scrip). The Tribunal first upheld the validity of the reopening, finding that the AO did not merely act on “borrowed satisfaction” but conducted independent verification and applied their mind to the credible information. On the merits of the addition, the ITAT affirmed the findings that the assessee failed to explain the investment rationale or justify the steep, improbable price rise of the scrip, which SEBI had confirmed was subject to price manipulation. Citing Supreme Court precedents like Sumati Dayal v. CIT, the Tribunal ruled that the genuineness of the transactions must be tested on the human probability test and surrounding circumstances, not just by producing documentary evidence like demat statements and contract notes.

Brief facts:

The assessee declared income of Rs. 13.74 lakh for AY 2017–18. Based on information from the Investigation Wing about bogus Long-Term Capital Gains (LTCG) from penny stock scrips, the Assessing Officer (AO) reopened the case under section 147 and added Rs. 93.92 lakh as unexplained income under section 68. The addition related to alleged bogus LTCG claimed as exempt under section 10(38) from sales of Kushal Tradelink Ltd. shares.

Assessee’s Contentions

• The reopening was invalid, being mechanical and based solely on Investigation Wing information (borrowed satisfaction).
• All transactions were genuine, supported by contract notes, demat and bank statements, and carried out through recognized stock exchange channels.
• Relied on various Delhi and Gujarat High Court judgments supporting the need for independent application of mind by AO.
• Cited a coordinate NFAC/ITAT decision in Pranav Mahendrabhai Patel v. ITO (similar scrip) where addition was deleted.

CIT(A) Findings

• Reopening held valid under section 147 since AO had tangible material from Investigation Wing and verified details before forming belief. Relied on Backbone Projects Ltd. v. ITO (Guj. HC).
• On merits, held that SEBI’s order had confirmed price manipulation in Kushal Tradelink Ltd.. The assessee failed to justify the improbable price rise or show genuine investment intent.
• Applied the human probability test and upheld the addition under section 68, treating LTCG as accommodation entry.

ITAT Decision

1. Validity of Reopening (Section 147):

The Tribunal upheld the reopening, noting that:

• AO had received specific and credible inputs from Investigation Wing post-search on Kushal Group.
• The AO conducted inquiries, verified records, and independently formed belief of escapement of income.
• Hence, the reopening was not mechanical or borrowed satisfaction but a valid action in law.
• Relied on Gujarat High Court ruling in Backbone Projects Ltd. v. ITO 131 taxmann.com80.

2. Addition under Section 68 (Bogus LTCG):

The Tribunal agreed with the lower authorities that:

The assessee failed to explain investment rationale or justify steep rise in scrip price.

Mere possession of demat statements, contract notes, or banking records did not establish genuineness when the scrip’s trading pattern showed manipulation through circular and synchronized trades.

Relied on binding precedents:

• PCIT v. Swati Bajaj 139 taxmann.com352 (Cal HC)
• PCIT v. Smt. Usha Devi Modi 151 taxmann.com119 (Cal HC)
• Suman Poddar v. ITO 112 taxmann.com330 (SC)
• Sumati Dayal v. CIT 214 ITR 801 (SC)

The Tribunal reiterated that genuineness must be tested on human probabilities and surrounding circumstances, not mere documentation.

The reliance placed on Deval Pranav Patel (ITA No. 182/Ahd/2024, 17.12.2024) was rejected as factual distinctions existed, and precedents cannot be blindly applied without contextual parity.

Final Outcome

• Reopening under section 147 held valid.
• Addition of Rs. 93.92 lakh under section 68 sustained.
• Appeal dismissed in entirety.

Reference

Case Laws Relied for Validity of Reopening (Section 147)

1. Backbone Projects Ltd. v. ITO 131 taxmann.com 80 (Gujarat HC)

Reopening valid where AO receives tangible material from Investigation Wing and applies own mind after verification, not mere borrowed satisfaction.

2. CIT v. SFIL Stock Broking Ltd. 325 ITR 285 (Delhi HC)

3. CIT v. Atul Jain 299 ITR 383 (Delhi HC)

4. Kamdhenu Steel & Alloys Ltd. v. CIT 248 CTR 33 (Delhi HC)

5. Varshaben Sanatbhai Patel v. ITO (Gujarat HC, ITA No. 12873 of 2014)

6. Meenakshi Overseas (P.) Ltd. v. Pr. CIT 82 taxmann.com 300 (Delhi HC)

These cases emphasize independent satisfaction by AO to uphold reopening and reject mechanical/borrowed satisfaction.

Case Laws Relied for Addition under Section 68 (Bogus LTCG)

1. Principal Commissioner of Income-tax v. Swati Bajaj 139 taxmann.com 352 (Calcutta HC)

Human probability and factual matrix prevail over mere documentary evidence in penny stock bogus gains.

2. Principal Commissioner of Income-tax v. Smt. Usha Devi Modi 151 taxmann.com 119 (Calcutta HC)

Upholds additions treating penny stock gains as unexplained income where genuineness and creditworthiness of counterparties not established.

3. Suman Poddar v. Income Tax Officer 112 taxmann.com 330 (SC)

Supreme Court dismissed SLP upholding treatment of penny stock share transactions as bogus.

4. Sumati Dayal v. CIT 214 ITR 801 (SC) Test of human probabilities and surrounding circumstances over documentary evidence applies to genuineness of income.

5. Kaushik Chandravadan Parikh v. ACIT 172 taxmann.com 694 (Mumbai ITAT)

6. Income-tax Officer v. Neetaben Snehalkumar Patel 167 taxmann.com 660 (Ahmedabad ITAT)

7. Shailesh K. Patel HUF v. ITO 164 taxmann.com 669 (Ahmedabad ITAT)

8. Smt. Paramadevi Tekriwal v. ITO 172 taxmann.com 430 (Ahmedabad ITAT)

These ITAT rulings uphold addition under section 68 in penny stock bogus LTCG cases based on similar facts.

9. Commissioner of Income-tax v. Sun Engineering Works (P.) Ltd. 64 Taxman 442 (SC)