Mechanical Sanction Sinks SPLASH MEDIA Penny Stock LTCG Reassessment

The Income Tax Appellate Tribunal (ITAT) Delhi has set aside an assessment against Damyanti Mundhra and other assessees, ruling that the reassessment proceedings initiated by the Income Tax Officer (ITO) were invalid due to a procedural flaw. The core issue of the case involved the department’s allegation that the assessees had claimed bogus tax-exempt long-term capital gains (LTCG) from trading in shares of a company identified as a “penny stock,” a common method for laundering unaccounted money.

The case originated when the ITO, acting on information from the Investigation Wing of the Income Tax Department, reopened the assessment for the financial year 2011-12. The Investigation Wing’s report suggested a “large-scale manipulation” in the share price of “SPLASH MEDIA” (also known as Luharuka Media & Infra Ltd.) by a syndicate to provide tax-exempt LTCG entries. Based on this information, the ITO issued a notice under Section 148 of the Income-tax Act, 1961, alleging that a significant amount of taxable income had escaped assessment.

The ITO’s assessment, which followed the reopening, concluded that the LTCG of approximately Rs. 20.98 lakh claimed by the lead assessee, Shriya Devi Mundhra, was not genuine but an arranged transaction. The officer referred to a nationwide investigation into organized rackets providing such “accommodation entries.” Consequently, the ITO added the LTCG to the assessee’s income under Section 68 of the Act, which deals with unexplained cash credits. Additionally, an amount of Rs. 1.05 lakh, representing a 5% commission on the bogus gains, was added as unexplained expenditure under Section 69.