Bahar Merchants Pvt. Ltd. Vs ITO (ITAT Kolkata)
Kolkata ITAT Upholds ₹2.79 Crore Section 68 Addition on Penny-Stock Purchase-Section 68 Covers Credit Purchases & Journal Entries; Credit Need Not Be Cash
The Kolkata ITAT upheld an addition of ₹2.79 crore under Section 68 arising from an alleged off-market purchase of penny-stock shares, laying down an important proposition that Section 68 is not confined to cash credits—a credit representing the value of goods/shares purchased on credit or recorded through journal entries can also fall within its ambit.
The assessee had purchased 3 lakh shares of Global Infratech & Finance Ltd. (GBLINFRA) at ₹93 per share for ₹2.79 crore through an off-market transaction from Spark Commodeal Pvt. Ltd. The shares were not sold during the year. Instead, they were valued as closing stock at ₹1.212 crore, resulting in a notional loss of ₹1.578 crore, which was set off against interest income of ₹1.721 crore.
The AO found several suspicious circumstances. There was no demat account or contract note, and only a bill dated 03.01.2014 was produced to substantiate the purchase. When the departmental Inspector visited the stated address of Spark Commodeal Pvt. Ltd., the entity could not be found and neighbouring occupants denied the existence of its office at that address.
Further, while the purported purchase consideration was ₹2.79 crore, only about ₹3 lakh appeared to have actually been paid, with the balance stated to have been settled or squared off through journal entries. The entire ₹2.79 crore purchase amount appeared as trade payable in the balance sheet.
The assessee’s principal legal argument was that Section 68 could not apply because there was no cash credit or corresponding receipt of ₹2.79 crore in its bank account. The Tribunal rejected this contention by relying upon the Karnataka High Court judgment in Smt. Rekha Krishna Raj v. ITO, whose SLP was subsequently dismissed by the Supreme Court.
The ITAT emphasised that the expression used in Section 68 is “found credited” and not “cash credited”. Therefore, the credit may represent cash or the value of supplies/purchases made on credit. Once the amount is credited in the books, Section 68 can apply if the assessee fails to satisfactorily explain the nature and source of that credit.
On genuineness, the Tribunal found the transaction highly dubious. The shares were purchased off-market from a struck-off/non-traceable company, there was only a single transaction in the particular scrip, the seller/broker’s identity and genuineness were not established, and the price of the scrip had fluctuated by approximately 125 times within two years without corresponding financial justification.
The Tribunal also noted that GBLINFRA was among the 84 penny stocks investigated by the Kolkata Investigation Wing, that SEBI had suspended trading in the scrip, and that operators/share brokers were found to have manipulated its price. It therefore applied the jurisdictional Calcutta High Court ruling in PCIT v. Swati Bajaj.
A particularly significant factual feature was that the shares were never actually sold during the year. The assessee simply reduced their closing-stock value from ₹2.79 crore to ₹1.212 crore and thereby generated a ₹1.578 crore artificial/notional loss, substantially wiping out its interest income of ₹1.721 crore. The Tribunal considered this an important circumstance supporting the Revenue’s case that the overall transaction lacked genuineness.
Accordingly, the ITAT held that the assessee had failed to discharge the onus of proving the genuineness of the purchase transaction and confirmed the entire ₹2.79 crore addition under Section 68. The appeal was dismissed.
Cases Discussed:
- PCIT Vs. P.L.Goenka (HUF) (Calcutta HC), [2025] 174 com588(Calcutta)
- Saroj Baid v. Income-tax Officer (Kolkata ITAT), [2023] 155 com630 (Kolkata – Trib.)
- Archana Rajendra Malu v. Income-tax Officer (Pune ITAT), [2023] 155 com625 (Pune – Trib.)
- Atmiben Alipitkumar Doshi v. Income-tax officer (Ahmedabad ITAT), [2023] 149 com104 (Ahmedabad – ITAT)
- NRA Iron & Steel (P.) Ltd. v. PCIT (SC), [2020] 117 taxmann.com 752/273 Taxman 14 (SC)
- Rekha Krishna Raj v. ITO (SC), [2017] 85 taxmann.com 256/250 Taxman 333 (SC)
- Principal Commissioner of Income-tax v. Swati Bajaj (Calcutta HC), [2022] 139 com352 (Calcutta)
- Rekha Krishna Raj v. ITO (Karnataka HC), [2013] 33 taxmann.com 64/215 Taxman 159 (Karn.)
- CIT vs. Precision Finance Pvt. Ltd. (Calcutta HC), 208 ITR 465 (Cal.)
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as Ld. ‘CIT(A)’] passed u/s 250 of the Act for AY 2014-15 dated 14.08.2025.
