Penny Stock Addition Deleted – Documentary Evidence Overrides Suspicion

Smt. Preeti Gupta Vs DCIT (ITAT Hyderabad)

The Hyderabad ITAT deleted additions made under Section 69A in alleged penny stock transactions, holding that genuine, documented transactions cannot be disregarded based on general investigation reports and suspicion.

The assessee had declared capital gains from sale of shares of Vandana Knitwear Ltd., supported by demat statements, contract notes, bank records, and SEBI-registered broker details. However, the AO treated the transactions as bogus based on investigation reports on penny stocks and added the entire sale proceeds as unexplained income.

The Tribunal observed that , no discrepancy was found in the documentary evidence, and no material was brought on record to establish involvement of the assessee in price rigging or accommodation entries. It emphasized that mere abnormal price fluctuations or general reports cannot justify addition without specific evidence against the assessee.

Accordingly, the ITAT held the transactions to be genuine, directed deletion of additions, and allowed capital gains treatment (including exemption in the second year), thereby allowing both appeals in favour of the assessee

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

These two appeals are filed by Smt. Preeti Gupta (“the assessee”), feeling aggrieved by the separate orders passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”) dated 14.05.2025 & 16.05.2025 for the A.Ys.2013-14 & 2014-15 respectively. Since identical issues are raised by the assessee in both these appeals, for the sake of convenience, these were heard together and are being disposed of by this common and consolidated order.

ITA No. 1174/Hyd/2025 for A.Y. 2013-14:

2. The assessee has raised the following grounds of appeal:

3. The assessee has also raised the following additional grounds of appeal:

“1. On the facts and circumstances of the case, the Learned NFAC, Delhi erred in assuming jurisdiction under section 151A read with section 144B of the Act with effect from 13.12.2021, whereas the notification issued under section 151A is operative only w.e.f. 29.03.2022, rendering the assessment proceedings without authority of law and liable to be quashed.

2. On the facts and circumstances of the case, the reassessment has been initiated on incorrect and inappropriate facts, as the reasons recorded allege non­disclosure of share transactions despite the appellant having duly disclosed short term capital gains of Rs.10,43,677/- on sale of shares of M/s. Vandana Knitwear Ltd., rendering the reopening invalid and bad in law”.

4. The Learned Authorized Representative (“Ld. AR”) submitted that additional grounds so filed are admissible in view of judgment rendered by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). The Learned Departmental Representative (“Ld. DR”) also did not make any objection for admission of the additional grounds. The prayer for admission of additional grounds noted above which are not in memorandum of appeal are being admitted for adjudication in terms of Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 owing to the fact that objections raised in additional grounds are legal in nature for which relevant facts are stated to be emanating from the existing records.

5. The brief facts of the case are that the assessee is an individual who filed her return of income for Assessment Year 2013–14 on 06.03.2014 declaring total income of Rs.32,28,850/-, which included short-term capital gain of Rs.10,43,677/-. During the year under consideration, the assessee had purchased 40,000 shares of M/s. Vandana Knitwear Limited for a total cost of Rs.20,00,850/- and sold 20,000 shares for a consideration of Rs.20,97,140/-, claiming cost of acquisition at Rs.10,50,511/- and securities transaction tax (“STT”) of Rs.2,952/-. Accordingly, the assessee offered short-term capital gain of Rs.10,43,677/- under section 111A of the Income Tax Act, 1961 (“the Act”). Subsequently, based on information received from the Investigation Wing, Hyderabad, that M/s. Vandana Knitwear Limited was a penny stock company and that the assessee was one of the beneficiaries, the Learned Assessing Officer (“Ld. AO”) reopened the assessment of the assessee under section 147 of the Act and issued notice under section 148 dated 30.03.2021. In response, the assessee filed return of income on 05.01.2022 declaring the same income as originally returned i.e. Rs.32,28,850/-. During the reassessment proceedings, the Ld. AO held that the share transactions entered into by the assessee were not genuine and were merely accommodation entries. Accordingly, the Ld. AO rejected the claim of short-term capital gain under section 111A of the Act and treated the entire sale proceeds of Rs.20,97,140/- as unexplained income under section 69A of the Act, without allowing deduction for cost of acquisition or STT. The reassessment was completed by the Ld. AO under section 147 r.w.s. 144B of the Act vide order dated 26.03.2022 determining total income of the assessee at Rs.42,82,308/-.

6. Aggrieved with the order of the Ld. AO, the assessee preferred an appeal before the Ld. CIT(A), who confirmed the addition made by the Ld. AO.

7. Aggrieved with the order of the Ld. CIT (A), the assessee is in appeal before this Tribunal. During the appellate proceedings, the assessee has withdrawn the additional ground no. 1. Accordingly, the additional ground no. 1 of the assessee is dismissed as withdrawn.

8. The Ld. AR submitted that the assessee has challenged both the validity of reopening under section 147 of the Act as well as the addition made under section 69A of the Act. On merits, the Ld. AR submitted that the Ld. AO has erred in treating the entire sale proceeds of Rs.20,97,140/- as unexplained income under section 69A of the Act. It was submitted that the addition has been made merely on the basis of information received from the Investigation Wing, Hyderabad, without any independent enquiry by the Ld. AO and is based on mere suspicion and presumption. The Ld. AR further submitted that the assessee had furnished all relevant documentary evidences before the lower authorities to substantiate the genuineness of the share transactions. It was submitted that the shares were purchased and sold through a SEBI registered broker on a recognized stock exchange, and the transactions were routed through a demat account. The demat statements were filed before the authorities. It was further submitted that the payments for purchase as well as receipts from sale were made through banking channels and the bank statements were also placed on record. It was also submitted that the assessee had furnished contract notes and ledger accounts issued by the registered broker evidencing the transactions. The Ld. AR contended that the lower authorities have not pointed out any discrepancy in the documentary evidences filed by the assessee. The Ld. AR further submitted that the allegation of the Ld. AO that the assessee had introduced unaccounted money in the garb of capital gains is not supported by any material evidence. It was submitted that no evidence has been brought on record to show movement of cash from the assessee to any broker or entry operator. It was also submitted that no person has named the assessee as a beneficiary of any bogus transaction or price rigging. The Ld. AR placed reliance on the decision of the Raipur Bench of the Tribunal in the case of Mohammad Anish Hingora Vs. ITO, reported in 175 taxmann.com 65, wherein under similar facts, the issue was decided in favour of the assessee. Accordingly, the Ld. AR submitted that the addition made by the Ld.AO is liable to be deleted.

9. Per contra, the Ld. DR relied on the orders of the lower authorities. It was submitted that the Investigation Wing, Hyderabad had conducted detailed enquiry and found abnormal fluctuations in the share price of the company. It was submitted that in Financial Year 2011–12, the share price ranged from Rs.49.95 to Rs.139.50, and in Financial Year 2012–13, it ranged from Rs.8.86 to Rs.199. Further, as on 11.08.2017, the share price had fallen to Rs.0.20. It was submitted that such abnormal fluctuations without any corresponding change in financials or business activities of the company clearly indicate manipulation in the share prices. It was further submitted that the trading in the shares was concentrated among a few persons/entities. It was also submitted that SEBI had conducted investigation and levied penalties in respect of irregular trading in the shares of the company. Accordingly, the Ld. DR submitted that the Ld. AO was justified in treating the transaction as non-genuine and making addition under section 69A of the Act.

10.We have carefully considered the rival submissions and perused the material available on record including the case laws relied upon. The core issue for our consideration is whether the Ld. AO was justified in treating the entire sale proceeds of shares as unexplained money under section 69A of the Act and denying the claim of short-term capital gain under section 111A of the Act. It is an undisputed fact that the assessee has furnished documentary evidences in support of the share transactions, including demat statements, bank statements, contract notes, and broker ledger accounts. There is also no dispute about the fact that the transactions of purchase and sale of shares are duly supported by documentary evidences and are routed through recognized stock exchange and banking channels. We further find that the lower authorities have not pointed out any discrepancy or defect in the evidences furnished by the assessee. No material has been brought on record to show that the documents submitted by the assessee are false or fabricated. We also find that the addition has been made primarily on the basis of general investigation report regarding penny stock transactions and abnormal price fluctuations in the shares of the company. However, no specific material has been brought on record to establish that the assessee was involved in any price rigging or accommodation entry. We have also gone through para no. 14 to 31 of the order of Raipur Bench of the Tribunal in the case of Mohammad Anish Hingora Vs. ITO (Supra), which is to the following effect:

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11. On a perusal of the above, we find that under identical circumstances, the Tribunal has decided the issue in favour of the assessee by relying on various decisions of the Hon’ble High Courts including Allahabad, Madhya Pradesh, Gujarat, Punjab & Haryana, and Rajasthan High Courts, holding that in the absence of any evidence to show involvement of the assessee in price rigging or bogus transactions, the addition cannot be sustained merely on the basis of suspicion. In the present case also, no evidence has been brought on record to show that the assessee was involved in manipulation of share prices or that the transactions were non-genuine. Further, no person has named the assessee as a beneficiary of any bogus accommodation entry. In view of the present facts and respectfully following the decision of the Raipur Bench of the Tribunal in the case of Mohammad Anish Hingora Vs. ITO (Supra), we are of the considered view that the Ld. AO was not justified in treating the entire sale proceeds of Rs.20,97,140/- as unexplained income under section 69A of the Act. Accordingly, we direct the Ld. AO to delete the addition made under section 69A of the Act and to treat the profit arising on sale of shares as short-term capital gain under section 111A of the Act.

12. Since we have decided the issue in favour of the assessee on merits, we do not propose to adjudicate the other grounds raised by the assessee, including the additional ground of appeal, which are kept open.

13. In the result, the appeal of the assessee in ITA No. 1174/Hyd/2025 is allowed.

ITA No. 1175/Hyd/2025 for A.Y 2014-15:

14. We have carefully considered the rival submissions and perused the material available on record including the case law relied upon. We find that the issue involved in the present appeal is identical to the issue involved in ITA No.1174/Hyd/2025 for Assessment Year 2013–14. In the said appeal, we have examined in detail the genuineness of the share transactions entered into by the assessee in respect of shares of M/s. Vandana Knitwear Limited and have held that the transactions are genuine and the addition made under section 69A of the Act is not sustainable. In the present appeal, the assessee has sold 20,000 shares of the same company, namely M/s. Vandana Knitwear Limited, for a total sale consideration of Rs.55,70,349/-, resulting in long-term capital gain of Rs.46,12,845/-, which has been claimed as exempt under section 10(38) of the Act. However, the Ld. AO denied the claim of exemption under section 10(38) of the Act and treated the entire sale consideration of Rs.55,70,349/- as unexplained income under section 69A of the Act. Since we have already held in ITA No.1174/Hyd/2025 that the transactions in the shares of M/s. Vandana Knitwear Limited are genuine, the same reasoning and findings squarely apply to the present appeal as well. Accordingly, following our findings in ITA No.1174/Hyd/2025, we direct the Ld. AO to delete the addition of Rs.55,70,349/- made under section 69A of the Act and to allow the exemption claimed by the assessee under section 10(38) of the Act in respect of long-term capital gain of Rs.46,12,845/-.

15. Since we have decided the issue in favour of the assessee on merits, we do not propose to adjudicate the other grounds raised by the assessee, including the additional ground of appeal, which are kept open.

16. In the result, the appeal of the assessee in ITA No. 1175/Hyd/2025 is allowed.

17. To sum up, both the appeals filed by the assessee are allowed.

Order pronounced in the Open Court on 17th April, 2026.