Ruchi Jain Vs ITO (ITAT Delhi Bench)
“Penny Stock” Label Is Not A Magic Wand -Without Nexus To Price Rigging, Ltcg u/s 10(38) Cannot Become Cash Credit U/s 68
Summary: The Delhi ITAT has held that genuine documentary evidence relating to the purchase & sale of shares cannot be discarded merely because the company was subsequently identified as a penny-stock company. Unless the AO establishes a specific nexus between the assessee or her broker & the alleged price-rigging operation, a general Investigation Wing report describing the modus operandi cannot justify treating LTCG as unexplained cash credit. The addition of ₹27.83 lakh u/s 68 & consequential commission addition were deleted.
Facts of the case
The assessee, Ruchi Jain, filed her return for AY 2014-15 declaring income of ₹7,54,526. Apart from income from her proprietary concern, M/s Crafts India, she disclosed LTCG of ₹27,83,690 arising from the sale of shares of Kappac Pharma Ltd.
The assessee claimed the capital gain as exempt u/s 10(38).
The case was selected for scrutiny. Based upon information received from the Investigation Wing, Kolkata, the AO treated the transaction as a prearranged penny-stock transaction designed to generate bogus exempt LTCG.
The assessment was completed at a total income of ₹10,42,05,500 after making several additions & disallowances. Insofar as the Kappac Pharma transaction was concerned, the AO added ₹27,83,695 u/s 68 r.w.s. 115BBE & made a further addition of ₹55,674, being alleged commission calculated at 2%.
The CIT(A) granted relief on certain other issues but confirmed the additions relating to the LTCG & alleged commission.
Assessee’s evidence
The assessee submitted that she had been allotted 4,000 equity shares of Kappac Pharma Ltd. in 2012. The shares were converted into electronic form in 2013, well before their sale through different transactions during 2014.
In support of the purchase, holding & sale, the assessee furnished documentary evidence, including contract notes, demat statements & details of banking transactions.
These documents demonstrated that the shares were held in the demat account, sold through recognised channels & the consideration was received through the banking system.
The assessee contended that neither her name nor that of her broker appeared in any material relating to the alleged price-rigging operation. No incriminating material establishing her participation in an accommodation-entry arrangement had been brought on record.
Husband’s identical transaction already accepted
The assessee’s husband, Shri Suresh Kumar Jain, had purchased 6,000 shares of the same company at the same time. He also sold those shares during AY 2014-15.
In his case, the CIT(A) accepted the genuineness of the transaction & deleted the addition. The Revenue challenged that deletion before the ITAT in ITA No. 1337/Del/2025, but the coordinate Bench dismissed the Revenue’s appeal.
The Tribunal in the husband’s case held that although the AO had extensively discussed the general features of penny stocks, the roles of operators, promoters & brokers and the mechanism of artificial price rigging, he had failed to establish any nexus between that assessee or his broker & the alleged manipulation.
Since the facts relating to the wife’s purchase & sale were identical, the assessee contended that the same conclusion must follow in her case.
AO calls documents genuine—but gives them no value
During the first appellate proceedings, the assessee furnished additional evidence. The CIT(A) called for a remand report from the AO.
Significantly, the AO stated in the remand report that the records & documents furnished by the assessee prima facie appeared to be genuine.
However, the AO argued that in cases involving bogus claims of LTCG, “substance” must prevail over “form” & therefore the documents should not be accorded evidentiary value.
Despite the AO’s acknowledgment regarding the apparent genuineness of the documents, the CIT(A) concluded that the purchase & sale of shares had been arranged to generate bogus LTCG & confirmed the additions.
Revenue’s contention
The Revenue argued that Kappac Pharma Ltd. had been identified as a penny-stock company. SEBI had investigated the company & trading in its shares was suspended in 2015.
The Investigation Wing’s report had also explained the mechanism used for converting unaccounted money into exempt LTCG through manipulated share transactions. Therefore, according to the Revenue, the addition deserved to be upheld.
ITAT’s decision
The Tribunal observed that neither the AO nor the CIT(A) had identified any defect in the documentary evidence furnished by the assessee regarding the purchase, holding & sale of shares.
More importantly, the transaction was identical to that of the assessee’s husband, whose investment in the same company had already been accepted as genuine by the coordinate Bench.
The general Investigation Wing report could explain how penny-stock operations were ordinarily conducted, but it did not establish that this particular assessee had participated in such an arrangement.
There was no evidence demonstrating that the transaction was fixed or premeditated, that the assessee had paid cash in exchange for accommodation entries or that she or her broker had participated in artificial price rigging.
Following the coordinate Bench’s decision in the husband’s case, the ITAT deleted the addition of ₹27,83,695 relating to the LTCG.
Once the principal addition was deleted, the consequential addition of ₹55,674 representing alleged commission at 2% also had no independent foundation & was deleted. The assessee’s appeal was accordingly allowed.
Author’s comments
The order reiterates that an Investigation Wing report may provide a legitimate starting point for enquiry, but it cannot become the finishing line. The AO must connect the general modus operandi with the assessee through evidence such as money trail, operator’s statement, broker linkage, cash movement or participation in price manipulation.
The AO’s remand report was internally contradictory. Having admitted that the documents appeared prima facie genuine, he could not discard them merely by invoking “substance over form” without proving what the supposed hidden substance actually was.
Consistency also mattered. The husband & wife acquired shares of the same company at the same time & sold them in the same assessment year. Once the husband’s transaction was judicially accepted on identical evidence, sustaining the wife’s addition would produce an indefensible contradiction.
The order contains an apparent typographical error by mentioning commission of ₹5,56,741 at one place. At 2% of ₹27,83,695, the correct figure is ₹55,674, which is also the amount ultimately deleted.
A share may be called a penny stock, but evidence cannot be purchased for a penny. Suspicion may begin an enquiry—only proof can finish an addition.
Cases Discussed
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT DELHI BENCH
This appeal by the Assessee is directed against the order dated 30.12.2025 of the National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the Assessment Order dated 28.12.2016 passed under section 143(2) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’)
by the Income Tax Officer, Ward 54(1), New Delhi, (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2014-15.
2. Revised grounds of appeal filed by the Assessee are reproduced as under:
“1. That the applicant craves leave to revise the ground no 2, 3, 5 and 6 of the grounds of appeal filed in the above captioned appeal
2 Ground No. 2: That, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the addition of ₹27,83,695/- under Section 68 read with Section 115BBE of the Act on account of alleged unexplained money and the consequential addition of 55,674/- being alleged commission @2%, along with the addition on account of alleged unexplained expenditure, without any cogent evidence and without properly appreciating the material on record and the provisions of the Act
3. Ground no 3: That, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the addition of 27,83,695/- made by the Ld. AO, along with the consequential addition of 55,674/- being alleged commission @2%,on account of alleged unexplained expenditure, without appreciating that the appellant’s name did not appear in the alleged price-rigging activities and in the absence of any incriminating material linking the appellant with such transactions.
4. Ground no 5: That, on the facts and in the circumstances of the case and in law, the Ld. AO erred in making the addition of ₹27,83,695/- under Section 68 read with Section 115BBE of the Act, along with the consequential addition of 55,674/- being alleged commission @2%, on account of alleged unexplained expenditure, without properly considering the documentary evidence furnished by the appellant in support of the exemption claimed under Section 10(38) of the Act.
5. Ground no 6: That, on the facts and in the circumstances of the case and in law, the Ld. AO erred in making the addition of 27,83,695/- under Section 68 read with Section 115BBE of the Act, along with the consequential addition of 55,674/- being alleged commission @2% on account of alleged unexplained expenditure, without conducting any independent enquiry and merely relying upon the report of the Directorate of Investigation, Kolkata.”
3. Brief facts of the case are that the assessee filed her return for A.Y. 2014-15 declaring income of Rs. 7,54,526/-. Besides, income from the proprietary business run in the name of M/s Crafts India, the assessee also earned Long Term Capital Gains (LTCG) of Rs. 27,83,690/- on the sale of scrips of Kappac Pharma Ltd. The case was selected for scrutiny and assessment was completed at an income of Rs. 10,42,05,500/- by making various addition and disallowance.
3.1 Aggrieved, the assessee preferred an appeal before the CIT(A), who allowed part relief to the assessee. However, the addition on account of disallowance of claim of LTCG of Rs. 27,83,695/- made u/s 68 of the Act, was confirmed by the CIT(A) alongwith consequential addition of Rs. 5,56,741/-, on account of commission @ 2% alleged by paid by the assessee on impugned transaction.
Aggrieved by the order of Ld. CIT(A), the assessee has filed present appeal before the Tribunal.
4. Before us, the Ld. AR has submitted that the assessee was allotted 4000 equity shares in Kappac Pharma Ltd. in 2012 which were converted into electronic format in 2013; much before the sale in different licensees during the year 2014. He has pointed out that the husband of the assessee, Sh. Suresh Kumarn Jain had also purchased 6000 shares of M/s Kappac Pharma Ltd., at the same time and those were sold subsequently in A.Y. 2014-15. Under identical facts and circumstances the coordinate bench in his case (ITA No.-1337/Del/2025) had accepted the transaction as genuine and confirmed the decision of Ld. CIT(A), who had deleted the addition after examining the entire transaction of purchase and sale of shares. He has, therefore, submitted that facts and circumstances being identical in this case, the LTCG should be treated as genuine and relief allowed to the assessee.
4.1 Ld. DR, on the other hand, has vehemently argued that M/s Kappac Pharma Ltd. had been found to be a penny stock company which was investigated by the SEBI and trading in itsshares was also suspended in 2015. Further, the report of investigation conducted by the Investigation Wing, Kolkata also established that the impugned transactions were bogus and hence the addition made by the AO and confirmed by Ld. CIT(A) deserves to be upheld.
5. We have heard the rival submissions and perused the material available on record. We note that the assessee had furnished additional details / documents relating to the impugned transaction before the CIT(A) in respect of which, remand report of the AO had been sought. Vide remand report, the AO submitted as under:
“Observations concerning the Merit of Additional Evidences:
(1) Additional Evidence w.r.t. to Addition of Rs. 27,83,695/- u/s 68 read with sec. 115BBE on account of bogus long term capital gain: I have gone through the above records and documents. Prima-facie the said records and documents appear to be genuine. However, it needs to be appreciated that in such cases of bogus claims of long term capital gains, “substance” must prevail over “form” and as such the above documents and records should not be considered to have any evidentiary value in the context of the said addition in respect of bogus claim of long term capital gain of the assessee.”
However, despite above comments of the AO, Ld. CIT(A) held that the purchase and sale of shares were arranged to generate bogus LTCG and confirmed the addition.
We note that neither the AO nor the CIT(A) has doubted the documentary evidences furnished by the assessee regarding purchase and sale the shares. Moveover, under identical facts and circumstances, the addition made in the case of Sh. Suresh Kumar Jain was deleted by the CIT(A) and the deletion was also upheld by the coordinate bench in department’s appeal with the following observations:
“4. Both sides heard, orders of the authorities below examined. A perusal of the assessment order shows that the AO based on the information received from Investigation Wing formed an opinion that the LTCG earned by the assessee on sale of shares of M/s. Kappac Pharma Ltd. is bogus as the shares of said company fall in the category of penny stock. The AO made addition of the entire LTCG claimed by the assessee on sale of shares of M/s. Kappac Pharma Ltd. I find that the AO in the assessment order has given a detailed finding explaining characteristics of a penny stock, role of share brokers, financial analyses of company, role of operator, role of promoter of penny stock companies in artificial rigging of penny stock shares prices and the manner in which penny stock is traded. The AO further explained as to how the penny stocks are used as artificial mode of reducing tax liability. However, in the entire assessment order, the AO has not established the nexus of assessee or the broker of the assessee in price rigging of the shares or the role of assessee or its broker in alleged penny stock scam resulting in artificial booking of bogus LTCG. The AO after having recorded the fact of assessee having sold shares of M/s. Kappac Pharma Ltd. and having earned LTCG on sale of said shares referred to the investigation report from Investigation Wing, Kolkata explaining modus operandi of trading in penny stock and role of share brokers, etc. The AO in the penultimate paragraph of the order concludes that the amount realized from the sale of shares of M/s. Kappac Pharma Ltd. is unexplained money u/s.69A of the Act and made addition of the same. There is no whisper in the assessment order alleging the transaction of purchase and sale of shares of M/s. Kаррас Pharma Ltd. by the assessee was in any manner fixed or premeditated. The assessee is order to discharge its onus in proving genuineness of transaction had furnished contract notes, demat statement and details of banking transactions. Hence, the AO has failed to establish that the transaction of sale of shares by the assessee is bogus. No controverting material is brought on record by the Revenue to dislodge findings of the First Appellate Authority. I find no infirmity in findings of the CIT(A) in deleting the addition.”
5.2 In view of the facts noted hereinbefore and the decision of the coordinate bench in the identical set of facts, we hereby delete the addition made on account of LTCG of Rs. 27,83,695/-.
5.3 Further, since the addition u/s 68 in respect of LTCG of Rs. 27,83,695/- has been deleted, the consequential addition on account of alleged commission @ 2% amounting to Rs. 55,674/- is also deleted.
6. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 09.09.2026.
