5-Day Share Trade Cannot Automatically Become “Bogus Penny Stock” – ITAT Deletes Additions Under Sections 69 & 69C

Girija Shivanand Nichanaki Vs ITO (ITAT Mumbai)

5-Day Share Trade Cannot Automatically Become “Bogus Penny Stock” – ITAT Deletes Additions Under Sections 69 & 69C

.The Mumbai ITAT deleted additions made under sections 69 and 69C against an assessee accused of entering into bogus penny stock transactions, holding that merely because a particular scrip was later identified as suspicious, every investor dealing in it cannot automatically be treated as part of a collusive arrangement.

The assessee was a regular trader in shares and had consistently traded in numerous scrips over multiple years through recognized stock exchanges. The disputed shares of Exelon Infrastructure Ltd. were purchased on 03.06.2011 and sold within just five days on 08.06.2011, resulting not in profit but in a small short-term loss of about ₹38,681.

The Tribunal observed that the AO had proceeded mainly on generalized investigation wing information and alleged modus operandi relating to penny stock operators, without bringing any material to show the assessee’s involvement, control, or collusion in manipulation of the scrip. Since the assessee had suffered a loss and exited the transaction within a very short period, the ITAT held that the transaction could not be branded as a make-believe arrangement merely on suspicion.

Accordingly, the ITAT deleted the addition of ₹4.38 lakh treated as unexplained investment under section 69 as well as the consequential 3% alleged commission addition under section 69C, holding that the additions were unsustainable in law.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is preferred by the assessee against the order of Commissioner of Income Tax Appeals/ National Faceless Appeal Centre (NFAC), Delhi [in short, “the Ld. CIT(A)”] dated 19.01.2026 for the assessment year 2012-13, which in turn arises from assessment order u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961 (“the Act”), dated 21.12.2019 passed by Income Tax Officer Ward 16(2)(4), Mumbai (in short, “the Ld. AO”). The grounds of appeal are as under:

“1 Ground 1- Sec 147 – On the facts and in the circumstances of the case, the learned I.T.O. 16(2)(4), Mumbai erred in invoking the provisions of section 147 of the Income tax Act. The same has been done by the learned AO on pure presumptions made by him and is violation of section 147 as it can be invoked by the AO only when he has reasons to believe that Income chargeable to tax has escaped assessment. The power u/s 147 of the act has been given to the assessing officer & he cannot rely on the belief made by any other person or persons like in our case. This very issue was decided in favour of an assesse by Delhi High Court in the case of G & G Pharma India Ltd in ITA No 545/2015 dt. 8.10.15 in which the H’ble High Court under similar circumstances as in the instant case held that the reasons recorded are not specific and, therefore, the same could not be regarded as bonafide reasons. Moreover, it was held that the basic requirement that the AO must apply his mind to the material in order to have reason to believe that the income of the assessee escaped assessment is missing. The appellant prays that the reassessment proceedings deserve to be quashed as they are void ab initio.

2 Ground 2- Sec 69- On the facts and in the circumstances of the case, the learned AO has misinterpreted the provisions of section 69. The primary requirement to invoke section 69 is that the assessee is unable to explain the source of such investment. However the appellant has explained the source of investment with all possible set of documents that would ordinarily be required to substantiate her claim. The appellant prays that the addition made u/s 69 by the learned AO may please be deleted.

3 Ground 3- Sec 69C- The learned AO has erred in treating the investment amount which has been shown in the books of the appellant as an unexplained investment u/s 69. Further the learned AO has gone onto add 3% of the investment amount as an alleged brokerage paid to the operators of the so called above scheme on pure assumptions & treated the same as an unexplained expenditure u/s 69C. The basic requirement for section 69C is that the expense should be recorded in the books of the assessee for which the assessee has not been able to offer an explanation. However no such expenses has been 69C may please deleted as it is based on surmises and incurred and therefore the question of recording the same does not arise. The conjectures.”

2. Briefly stated, the reopening assessment u/s 147 of the Act in the present case has been completed on 24.12.2019, wherein two additions were made u/s 69 for Rs.4,38,075/- and u/s 69C for Rs.13,142/-. The genesis of the aforesaid additions was on account of share transactions by the assessee which are considered as make-believe transactions by the Ld. AO and therefore, the same was treated as unexplained investment u/s 69 of the Act. Further, 3% has been added as unexplained expenditure which is assumed to be a commission paid by the assessee on the aforesaid bogus transactions u/s 69 of the Act. Aggrieved thereby, the assessee preferred an appeal before the CIT(A), but remained unsuccessful as the appeal of assessee stands dismissed by stating that the assessee was unable to rebut the detailed findings of Ld. AO by bringing on record any convincing material to demonstrate that the transaction is driven by genuine commercial operation and not a structured entry. The addition on account commission expenditure was also confirmed following the same corollary.

3. Being dissatisfied with the aforesaid findings of Ld. CIT(A), the assessee preferred an appeal, which is under consideration in the present matter.

4. At the outset, Ld. Counsel of the assessee submitted that the assessee is a genuine investor having several investments in various scripts through recognized stock market. The script which is doubted by the Ld. AO namely shares of ‘M/s. Exelon Infrastructure Ltd.’ was one of such scripts in which the assessee has invested and traded during the year under normal course of her business. On being queried by the Bench, the assessee also furnished the details of short-term capital gain/loss through trading in various shares in stock exchange.

5. On perusal of the statement of shares, apparently the assessee has earned short-term capital gain/loss in various shares / scripts, shows that the assessee is regular in the activity of trading in various scripts, starting from financial year 2010-11 upto 2015-16 and so forth. The assessee had transacted in number of shares which are 92 in assessment year 2011-12, 18 in assessment year 2013-14, 34 in assessment year 2014-15 and more than 100 in assessment year 2015-16. For the year under consideration AY 2012-13, the assessee traded in various scripts which are 14 in number and the share or scripts which is alleged to be bogus or penny stock by the Ld. AO were purchased on 03.06.2011 for Rs.4,41,360/- and sold on 08.06.2011 forRs. 4,02,671/-, thereby had generated a loss of Rs.(38,681/-).

6. Considering the aforesaid facts and circumstances, wherein the assessee is a regular trader in shares in number of scripts, as described hereinabove, in case one script which is purchased regular course, traded and sold within five days, if the same is found to be a penny stock on account of information received by the AO from investigation wing, the assessee cannot be held to be involved in and to have control over the transaction in such scripts. Further, since the assessee had purchased the share and sold those shares within five days itself, it cannot be construed that the assessee is also a part of the collusion by which branded the script to be a penny stock. Further, the assessee has achieved a meager loss from sale of such shares, therefore, the contentions of Ld. AO based on generalized modus operandi through which the particular script was going through, the assessee in particular which is before us, cannot be held to be the assessee in default or the assessee involved in such make-believe transactions.

7. In view of aforesaid observations, we are of the considered view that the addition made u/s 69 for Rs.Rs.4,38,075/- and further the addition consequent to such addition deeming payment of commission at the rate of 3% u/s 69C cannot sustain. We therefore, direct to set aside the order of Ld. CIT(A) and to delete the entire addition u/s 69 as well as u/s 69C of the Act.

8. In result, the appeal of assessee stands allowed in terms of our aforesaid observations.

Order pronounced in the open court on 15-05-2026.