Krutik Ashokkumar Parikh-HUF Vs ITO (ITAT Ahmedabad)
Conclusion: Addition of ₹21,72,300/- made by AO under section 68 was justified as sale of Karma ISP penny stock shares was a sham transaction and non-genuine which was being used in tax evasion practices to convert unaccounted income into exempt income.
Held: Assessee, had originally declared an income of Rs. 1,90,780/-. AO reopened the assessment under section 147 after receiving information that the HUF had traded in a penny stock, Karma ISP. Assessee did not submit a revised return in response to the notice. During reassessment, AO noted that assessee sold 7,800 shares of Karma ISP for Rs. 21,72,300/-, which were originally purchased for Rs. 1,76,670/-. Although assessee claimed the gains as exempt long-term capital gains under section 10(38), AO concluded that the transactions were not genuine, as Karma ISP was a known penny stock often used to convert unaccounted funds into tax-exempt income. As the assessee failed to respond to the notice under section 148 or provide any submissions during the proceedings, AO added Rs. 21,72,300/- to the income under best judgment assessment. Assessee told CIT (A) that the transaction was genuine, done through recognized stock exchanges with STT paid, and eligible for exemption under section 10(38). AO pointed out that the 118% gain from a single scrip in 15-16 months had no commercial justification, and Karma ISP was identified as a penny stock used to create fake exempt gains. CIT(A) agreed with the AO, noting the unusual high returns, lack of further trading, and suspicious nature of the scrip, which assessee could not prove as genuine. The addition of Rs. 21,72,300/- was upheld. On appeal. It was held that it was beyond reasonable doubt that the transaction, though apparently structured as a genuine share trade on paper, did not meet the test of commercial credibility and human probability. The long gap between purchase and payment, absence of supporting commercial rationale, the astronomical and unjustified rise in price of a non-performing company and assessee’s lack of further or prior involvement in share trading with respect to this stock, all point toward a pre-conceived and colourable transaction aimed at tax avoidance. The facts of the case fit squarely within the pattern identified by various Courts and the CBDT regarding penny stock manipulations. Therefore, CIT(A) rightly upheld the AO’s conclusion that the present transaction was a sham transaction aimed at tax avoidance. Addition of ₹21,72,300/- made by the AO under section 68 was justified.
