ITO Vs Pawan Finvest Pvt. Ltd. (ITAT Delhi)
Delhi ITAT Deletes Section 68 Addition on Penny Stock Losses; Mere Suspicion and Human Probabilities Cannot Replace Evidence
The Delhi ITAT upheld the deletion of an addition of ₹81.72 lakh under section 68 arising from the assessee’s alleged bogus loss on trading in penny stocks, holding that the Revenue had failed to establish any nexus between the assessee and the alleged price manipulation. The Assessing Officer had treated the losses incurred on transactions in the shares of JRI Industries & Infrastructure Ltd. and PMC Fincorp Ltd. as fictitious on the ground that the companies lacked financial fundamentals and were penny stocks, and consequently denied the set-off of such losses against profits earned from sale of other shares. The Tribunal noted that the assessee had produced contract notes, demat statements, bank statements, broker ledger accounts, details of STT paid and share transaction records evidencing that the transactions were executed through recognised stock exchanges. It further observed that the Assessing Officer had not brought any material on record linking the assessee with entry operators, exit providers, price rigging or any SEBI proceedings, nor had any statutory authority declared the assessee’s transactions to be sham. Holding that mere suspicion, application of the theory of human probabilities, or the poor financials of the companies cannot justify an addition in the absence of cogent evidence, the Tribunal affirmed the CIT(A)’s order deleting the addition under section 68. Since the Revenue’s appeal failed on merits, the assessee’s cross-objection challenging the validity of the reassessment was treated as academic and was dismissed without adjudication.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the revenue and cross objection by the assessee, both are against the order of Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 22.9.2025 in Appeal No. NFAC/2012-13/10258626 for Assessment Year 2013-14. Since the appeal filed by the revenue and cross objection filed by the assessee are inter-connected, thus we have heard the same together and disposed of by this common order for the sake of convenience, by dealing firstly with Revenue’s appeal.
2. The Revenue has raised the following grounds of appeal:-
1. Whether on the facts of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 81,72,410/- made by the AO u/s. 68 of the Act on account of non-genuine transactions in trading in scrip of JRI Industries & Infrastructure Ltd. and PMC Fincorp Ltd. carried out by the assessee during FY 2012-13 relevant to AY 2013-14.
2. Whether on the facts of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that the assessee failed to establish genuineness of its transactions in trading in scrip of JRI Industries and Infrastructure Ltd. and PMC Fincorp Ltd. during assessment proceedings with documentary evidences on account of which addition of Rs. 81,72,410/- was made by the AO u/s. 68 of the Act.
3. Whether on the facts of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that the scrips JRI Industries and Infrastructure Ltd. and PMC Fincorp Ltd. do not have financial fundamentals to justify the sharp rise in market price of shares.
4. Whether on the facts of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that the exit providers do not have creditworthiness.
3. The assessee has raised the following grounds in its cross objection:
1. That having regard to the facts and circumstances of the case, Ld. CIT(A) ought to have quashed the impugned reassessment order passed by the AO as the same has been passed without assuming jurisdiction as per law and without complying with mandatory and statutory conditions laid down u/s. 147 to 151A of the Act and without recording `reason’ and without obtaining approval u/s. 151 in accordance with law.
2. That in any case and in my view of the matter, the impugned reassessment order dated 15.5.2023 is illegal, without jurisdiction, bad in law, and contrary to the facts and circumstances of the case.
4. The brief facts of the case are that the assessee company had not filed its return of income for the AY 2013-14. The AO received information from the insight portal that the assessee company has traded penny scrip of M/s JRI Industries & Infrastructure Ltd. and M/s PMC Fincorp Limited and claimed loss. These two companies do not have business and the market price of shares also not supported by financial fundamentals of the company. The assessee, is one of the beneficiaries, has claimed fictitious and non-genuine loss by trading in those two penny scrips. Based on the above information, notice u/s 148 of the Act was issued on 28.07.2022. Accordingly, the AO had issued various statutory notices and in response to those notices, the assessee submitted the documents. The assessee has claimed loss of Rs. 81,72,410/- on trading two penny scrips M/s JRI Industries & Infrastructure Ltd and M/s PMC Fincorp Limited. Further, the assessee has earned profit of Rs. 91,61,349/- from sale of 671544 shares of scrip M/s Cubical financial Services Ltd during June and July 2012. Since the loss in penny stocks has been treated as fictitious and bogus loss, the AO has not allowed to set off the bogus loss of Rs. 81,72,410/- with the gain of Rs. 91,61,349/- earned. Therefore, the AO has held that total bogus loss in the hands of the assessee is treated to be Rs. 81,72,410/- Hence, the AO issued show cause notice for proposed addition of Rs. 81,72,410/- to be added back to the taxable income under section 68 u/s 115BBE of the I.T. Act, 1961. The assessee furnished the reply. After considering the same, AO completed the assessment with assessed income of Rs. 85,93,230/. Against the above, assessee preferred the appeal before the Ld. CIT(A), who vide his impugned order dated 22.9.2025 has allowed the appeal of the assessee. Aggrieved, revenue is in appeal before us.
5. Before us, the Ld. AR of the assessee relied upon the order of the Ld. CIT(A).
6. On the other hand, the Ld. Sr. DR vehemently supported the order of the Assessing Officer. He submitted that Ld. CIT(A)/NFAC erred in deleting the addition of Rs. 81,72,410/- made by the AO u/s. 68 of the Act on account of non-genuine transactions in trading in scrip of JRI Industries & Infrastructure Ltd. and PMC Fincorp Ltd. carried out by the assessee during FY 2012-13 relevant to AY 2013-14 and also failed to establish the genuineness of its transactions in trading in scrip of JRI Industries and PMC Fincorp. It was further submitted that these two companies do not have financial fundamentals to justify the sharp rise in market price of shares and also ignored the fact that the exit providers do not have creditworthiness.
7. We have heard the rival contentions and perused the records. We find that Ld. CIT(A) has given an elaborate finding on the issue in dispute by observing as under:-
“7.2 The appellant, is a company, had not filed its return of income for the A.Y. 2013-14. The AO received information from the INSIGHT portal that the appellant company has traded in penny scrips of M/s JRI Industries & Infrastructure Ltd (JRIIIL) and M/s PMC Fincorp Limited (PMCFL) and claimed loss. These two companies do not have business and the market price of shares also not supported by financial fundamentals of the company. The appellant, is one of the beneficiaries, has claimed fictitious and non-genuine loss by trading in those two penny scrips. Based on the above information, notice u/s 148 of the Act was issued on 28.07.2022. Accordingly, the AO has issued various statoary notices and in response to those notices, the appellant submitted the documents. The appellant has claimed loss of Rs. 81,72,410/- on trading two penny scrips M/s JRI Industries & Infrastructure Ltd and M/s PMC Fincorp Limited. Further, the appellant has earned profit of Rs. 91,61,349/- from sale of 671544 shares of scrip M/s Cubical financial Services Ltd during June and July, 2012. Since the loss in penny stocks has been treated as fictitious and bogus loss, the AO has not allowed to set off the bogus loss of Rs. 81,72,410/- with the gain of Rs. 91,61,349/- earned. Therefore, the AO has held that total bogus loss in the hands of the appellant is treated to be Rs. 81,72,410/. Therefore, the AO completed the assessment with assessed income of 85,93,230/-. The present appeal is filed against the addition of Rs. 81,72,410/-.
7.3 During the course of appellate proceedings, the appellant has filed the written submission along with judicial decisions and the same is perused by the undersigned. The appellant has claimed that the AO has not established the loss claimed is the bogus loss. The AO has held that trading loss on those two penny scrips as the bogus loss and the same is assessed as income of the appellant u/s 68 of the Act. During the course of appellate proceedings, to establish the genuineness of loss claimed by the appellant, the appellant has submitted details of share investment, trading in shares by the appellant on recognized stock exchange, SIT paid during the year under consideration, contract notes of purchase of shares of those two penny scrips, bank statement of the appellant company for sale and purchase of shares for the year under consideration, transaction ledger of the appellant company in the books of the broker and demat statement of the appellant company for the year under consideration. Though the appellant has furnished the elaborate and detailed submission for establishing the genuineness of the loss claimed, the AO has not brought on records any material linking the appellant in any of the dubious transactions relating to entry, price rigging or exit providers. In this transaction, the appellant company is one of the entities merely as investor, who invested in these shares to earn profit. However, when the price of the stock fall down suddenly with a huge gap, the appellant has sold to avoid more loss in future.
Even in the SEBI report, there is no mention or reference to the involvement of the appellant company on the issue of rigging the stock prices. Further, no transaction in the name of the appellant has been declared as invalid by any of the statutory authority including SEBI and there is no mention or reference of the involvement of the appellant company. Further, the appellant has established the identity, creditworthiness and genuineness of the transactions to meet all the requirements of ingredients as mentioned in section 68 of the Act. In this case, the AO has made assumption and applied human probabilities and held those two scrips to be a penny scrip without bringing on records how the appellant is involved in any of scrupulous activities or directly linked to one of the persons who has involved in manipulation/rigging share prices, entry operator or exit operator. There is no material with the AO to substantiate his findings that the impugned losses are not genuine. In view of the above-mentioned facts and discussions, in the absence of material evidence to disprove the claim of the loss as bogus loss, therefore, the addition made by the AO u/s 68 of the Act is deleted. The appellant has raised the objection on the addition of Rs. 81,72,410/- through ground nos. 5 & 6, therefore, ground nos. 5 & 6 are decided in favour of the appellant.”
8. After perusing the aforesaid findings of the Ld. CIT(A), we note that it was the claim of the assessee that AO has not established the loss claimed as the bogus loss. It was further submitted that the AO has held that trading loss on those two penny scrips as the bogus loss and the same is assessed as income of the assessee u/s 68 of the Act. It is noted that during the course of appellate proceedings, to establish the genuineness of loss claimed by the assessee, the assessee has submitted details of share investment, trading in shares by the assessee on recognized stock exchange, STT paid during the year under consideration, contract notes of purchase of shares of those two penny scrips, bank statement of the appellant company for sale and purchase of shares for the year under consideration, transaction ledger of the assessee company in the books of the broker and demat statement of the assessee company for the year under consideration. Ld. CIT(A) noted that though the assessee has furnished the elaborate and detailed submission for establishing the genuineness of the loss claimed, however, the AO has not brought on records any material linking the assesse in any of the dubious transactions relating to entry, price rigging or exit providers. In this transaction, the assessee company is one of the entities merely as investor, who invested in these shares to earn profit. However, when the price of the stock fall down suddenly with a huge gap, the assessee has sold to avoid more loss in future. It is observed that Ld. CIT(A) noted that even in the SEBI report, there is no mention or reference to the involvement of the assessee company on the issue of rigging the stock prices. Further, no transaction in the name of the assessee has been declared as invalid by any of the statutory authority including SEBI and there is no mention or reference of the involvement of the appellant company. Further, the assessee has established the identity, creditworthiness and genuineness of the transactions to meet all the requirements of ingredients as mentioned in section 68 of the Act. In this case, the AO has made assumption and applied human probabilities and held those two scrips to be a penny scrip without bringing on records how the assessee is involved in any of scrupulous activities or directly linked to one of the persons who has involved in manipulation/rigging share prices, entry operator or exit operator. There is no material with the AO to substantiate his findings that the impugned losses are not genuine. In view of the aforesaid factual matrix, in the absence of material evidence to disprove the claim of the loss as bogus loss, the addition made by the AO u/s. 68 was rightly been deleted by the Ld. CIT(A), which do not require any interference on our part, hence, we affirm the same and reject the grounds raised by the Revenue.
9. As regards assessee’s cross objection is concerned, since we have already dismissed the revenue’s appeal on merits, as aforesaid, the grounds raised by the assessee in its cross objection have become academic, thus need not be adjudicated at this stage.
10. In the result, Revenue’s Appeal as well as Assessee’s Cross Objection both are dismissed.
Order pronounced in the Open Court on 24-7-2026.
