Human probability test applied to penny stock transactions, with sale proceeds treated as unexplained credit and related expenditure estimated.

Penny stock share transactions were examined on the test of human probability and surrounding circumstances, and the apparent form was rejected where the purchase and sale pattern, quick transfer of physical shares, broker denial, and the assessee's earlier statement indicated a non-genuine arrangement. The sale proceeds claimed as long-term capital gains were therefore treated as unexplained cash credit under section 68. On the same factual basis, the authority inferred that expenditure would have been incurred to procure the artificial capital gain entries, and upheld an estimated addition of 5% of the sale consideration as unexplained expenditure under section 69C.

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Issues: (i) Whether the sale proceeds claimed as long-term capital gains from penny stock share transactions were liable to be assessed as unexplained cash credit under section 68 of the Income-tax Act, 1961. (ii) Whether an addition of 5% of the sale consideration was sustainable as unexplained expenditure under section 69C of the Income-tax Act, 1961.

Issue (i): Whether the sale proceeds claimed as long-term capital gains from penny stock share transactions were liable to be assessed as unexplained cash credit under section 68 of the Income-tax Act, 1961.

Analysis: The purchase and sale pattern, the unusually quick transfer of physical shares, the broker's denial of the stated transaction, the assessee's earlier statement under search proceedings, and the surrounding circumstances were assessed on the test of human probability. The explanation that the purchases were genuine was found not to be reliable, and the apparent form of the transactions was treated as not reflecting the real nature of the dealings. The sale proceeds were therefore treated as unexplained credits.

Conclusion: The addition under section 68 was upheld and the issue was decided against the assessee.

Issue (ii): Whether an addition of 5% of the sale consideration was sustainable as unexplained expenditure under section 69C of the Income-tax Act, 1961.

Analysis: Once the share transactions were found to be bogus on the basis of probabilities and surrounding circumstances, it was reasonable to infer that consideration had been paid to arrange the artificial capital gain entries. The estimation of expenditure at 5% of the sale consideration was accepted as a reasonable estimate on the facts found.

Conclusion: The addition under section 69C was upheld and the issue was decided against the assessee.

Final Conclusion: The claimed long-term capital gains were held to be non-genuine and both additions made by the Revenue were sustained.

Ratio Decidendi: In determining the genuineness of share transactions for tax purposes, the taxing authority may reject the apparent form and apply the test of human probability and surrounding circumstances; where the explanation is unsatisfactory, the receipts may be treated as unexplained income and related expenditure may also be estimated and taxed.

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