Penny Stock LTCG Addition U/s 68 Deleted – Documentary Evidence Accepted; Suspicion Cannot Replace Proof – ITAT Mumbai

Dilip Bhanverlal Dangi (HUF) Vs ITO (ITAT Mumbai)

Penny Stock LTCG Addition U/s 68 Deleted – Documentary Evidence Accepted; Suspicion Cannot Replace Proof – ITAT Mumbai

The assessee (HUF) claimed exemption u/s 10(38) on long-term capital gains of ₹19.41 lakh arising from sale of shares of Radford Global Ltd. The AO, relying on investigation reports alleging penny stock manipulation, rejected the exemption and treated entire sale proceeds of ₹19.97 lakh as unexplained cash credit u/s 68. CIT(A) upheld the addition.

Before ITAT, the assessee demonstrated that shares were purchased and sold through recognized stock exchange via registered broker, held in demat account for more than one year, and all payments were routed through banking channels supported by contract notes and confirmations. The Tribunal noted that Revenue failed to conduct independent enquiry or bring any direct evidence linking the assessee to price rigging or accommodation entry operators. Neither the assessee nor the broker was found in any SEBI list of beneficiaries.

ITAT held that mere reliance on general investigation reports or abnormal price movement cannot justify addition in absence of specific incriminating material. Since documentary evidence remained uncontroverted and suspicion cannot substitute proof, the addition u/s 68 was deleted and the assessee’s appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal filed by the assessee arises out of the order dated 13/08/2025 passed by the Ld. Commissioner of Income Tax (Appeals), Addl./JCIT(A)- Agra, Mumbai [hereinafter the “Ld.CIT(A)”] for A.Y. 2014-15.

2. The assessee filed the return of income for the year under consideration declaring total income of ₹1,72,590/-. The assessee claimed exemption u/s 10(38) amounting to ₹19,41,621/-representing long-term capital gains arising from sale of shares. The case was selected for complete scrutiny and notice u/s 143(2) along with u/s 142(1) of the Act was issued to the assessee. In response to the statutory notices, the assessee furnished the requisite details as called for. The Ld. AO noted that the assessee purchased shares of Rosette Resorts Ltd. at ₹10/- per share for a total consideration of ₹50,000/- on 19/11/2011. It was observed that on 02/02/2013 the company subdivided its shares from face value of ₹10/- each to ₹2/- each. Thereafter, the company changed its name from Rosette Resorts Ltd. to P.S. Global Ltd. and subsequently to Radford Global Ltd.

2.1. The Ld. AO observed that, the assessee earned long-term capital gains during the year under consideration on sale of shares of Radford Global Ltd. amounting to ₹19,41,621/-, which was claimed as exempt u/s 10(38) of the Act. Considering the transaction to be suspicious, the Ld. AO conducted detailed enquiries based on information received from the Investigation Wing and findings of SEBI. After examination, the Ld. AO rejected the exemption claimed u/s 10(38) and treated the entire sale consideration of ₹19,97,200/- as unexplained cash credit u/s 68 of the Act, alleging that the transaction of sale and purchase was not genuine and formed part of accommodation entry scheme.

Aggrieved by the order of the Ld. AO, the assessee preferred an appeal before the Ld.CIT(A).

3. The Ld.CIT(A), after considering the submissions of the assessee, upheld the addition made by the Ld. AO.

Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before the Tribunal.

4. Before us, the Ld. AR submitted that, the entire transactions relating to purchase as well as sale of shares of Radford Global Ltd. were carried out through the online trading mechanism of the BSE. The payments for purchase and the receipts on sale, were made through proper banking channels. It was submitted that, the shares were held for more than one year, i.e., approximately 18 months. The Ld. AR further submitted that, the purchase and sale transactions were duly recorded in the assessee’s demat account and were supported by contract notes, sale bills, and confirmations from the stock broker. It was contended that there is no allegation of any direct involvement of the assessee or his stock broker in any manipulation. The Ld. AR submitted that the Ld. AO has not brought any cogent evidence on record to discredit the documentary evidence maintained in the books of the assessee and merely proceeded on the investigation reports without carrying out any independent enquiry. The Ld.AR emphasised that, the entire investment made by assessee upon purchase and sale of shares of Radford Global Ltd., is carried out through registered broker at the prevailing market-price and the payments were received through proper banking channels from the stock exchange. He thus submitted that, no addition can be made u/s 68 of the Act on this premise.

4.1. On the contrary, Ld.DR emphasised that, these are closed circuit transactions and are pre-structured. The Ld.DR submitted that, assesse failed to discharge its onus of establishing the genuineness of the transactions and, therefore, the observation of authorities below deserve to be upheld.

I have perused the submissions advanced by both sides in light of the record placed before this Tribunal.

5. It is noted that, no independent enquiries were carried out by the Ld. AO in respect of the documentary evidence furnished by the assessee relating to the purchase and sale of shares of Radford Global Ltd. The transactions undertaken by the assessee cannot be treated as sham merely on the ground that, assessee traded in a scrip which was categorized as a penny stock.

5.1. Undisputedly, the purchase and holding of shares in the Demat account and the subsequent sale of shares through the Demat account have not been disputed by the Revenue. It is also not the case of the Revenue that either the name of the assessee or that of the broker through whom the transactions were carried out appears in the list of beneficiaries alleged to be involved in price rigging of shares of Radford Global Ltd. Further, there is no allegation by SEBI regarding any involvement of the assessee or his broker in manipulation of the share price.

5.2. Considering the totality of the facts and circumstances of the case, we find that the addition made by the Ld. AO is primarily based on general observations contained in the Investigation Wing report and the suspicion surrounding transactions in penny stock scrips, without bringing any specific material on record to establish direct nexus between the assessee and any alleged accommodation entry operators. The documentary evidence furnished by the assessee, including Demat statements, contract notes, bank statements, and broker confirmations, has not been found to be false or fabricated by the Revenue. It is a settled principle of law that suspicion, however strong, cannot take the place of evidence.

5.3. In the present case, the Revenue has failed to rebut the evidentiary value of the documents produced by the assessee or to demonstrate that the impugned transactions were non-genuine. There is no material to show that the consideration received on sale of shares had flown back to the assessee in any manner or that the assessee was a beneficiary of any pre-arranged scheme. In the absence of any cogent incriminating evidence against the assessee and having regard to the consistency and verifiability of the evidences placed on record, it is held that the observations of the authorities below are not sustainable in law.

5.4. It is a settled position of law that suspicion, however strong, cannot take the place of proof. Mere inclusion of a scrip in an investigation report as a penny stock, in the absence of any material demonstrating the Assessee’s involvement in price manipulation or accommodation entry arrangements, is insufficient to justify an addition. The burden cast upon the Assessee to establish the genuineness of the transaction stands duly discharged by the documentary evidences placed on record, and the Revenue has failed to rebut the same with any cogent material.

Accordingly, the addition made u/s 68 of the Act in respect of the sale proceeds of shares is not sustainable and deserves to be deleted.

Accordingly, grounds raised by assessee stand allowed. In the result, appeal of the assessee stands allowed.

Order pronounced in the open court on 13/02/2026