Facts Tradelink Private Limited Vs ITO (ITAT Mumbai)
The case was reopened based on information from search on Naresh Jain, who was found to run a syndicate providing bogus LTCG/LTCL entries through penny stock scrips such as Nyssa Corporation Ltd. AO alleged that the Assessee too availed bogus loss of ₹26,13,000/- in Nyssa scrip and denied carry forward of the loss, treating it as accommodation entry.
Assessee argued that:
- It is not an investor but a trader in shares.
- It did not claim any LTCG exemption u/s 10(38).
- The loss was claimed as business loss, not capital loss.
- All trades were done through a SEBI-registered broker on stock exchange at market price.
- Complete evidences such as contract notes, demat statements, broker ledger, bank statements, audited accounts were furnished.
- No linkage with Naresh Jain was established.
- AO made additions based only on general modus operandi and third-party statement, without specific evidence against Assessee.
- Cross-examination of Naresh Jain was requested but denied.
CIT(A) upheld the addition, merely relying on general observations & Delhi High Court decision in Vikash Jain, stating Nyssa was penny stock and transactions were pre-arranged.
Tribunal’s Findings:
Tribunal noted that:
- AO did not analyse Assessee’s financials or business conduct.
- Assessee had not claimed any exempt LTCG; instead disclosed business trading loss.
- All transactions were supported by proper documentation.
- AO ignored these evidences and made addition solely on general information and suspicion.
- No material or statement showed any nexus of Assessee or broker with Naresh Jain.
- Reliance on penny stock modus operandi cannot override actual facts.
- Mumbai ITAT in Graceunited Developers Pvt. Ltd. (on similar facts) held that trading loss cannot be disallowed merely by labeling the scrip as penny stock when shares are traded on exchange & no exemption is claimed.
Applying the same ratio, Tribunal held that the loss was genuine business loss and addition u/s 68 or treating it as bogus was unjustified.
- Loss of ₹26,13,000/- allowed as business loss
- Addition deleted in full
- Other legal grounds (jurisdiction, reopening, use of third-party statement without cross-exam) were not adjudicated as the issue was already decided on merits.
When shares are traded on stock exchange through registered broker, supported by contract notes, demat & bank statements, and no capital gains exemption is claimed, the transaction cannot be treated as penny stock accommodation entry merely on general third-party statements. Genuine business loss must be allowed.
