Penny stock LTCG exemption denied under section 10(38) for stage-managed transactions converting unaccounted income

ITAT Mumbai dismissed assessee's appeal claiming LTCG exemption u/s 10(38) on penny stock sales. The tribunal held that investigation commenced from companies involved in penny stock trading, not from assessee, making procedural objections invalid. Assessee failed to discharge initial burden under section 68 to prove genuineness of steep price rise in penny stocks within short period. The tribunal found transactions were stage-managed to convert unaccounted income into fictitious LTCG and claim bogus exemption. AO was justified in denying section 10(38) exemption and treating bogus LTCG as unexplained cash under section 68.

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Issues Involved:
1. Violation of principles of natural justice.
2. Bogus and sham transaction of the sale of shares.
3. Denial of exemption of long-term capital gain (LTCG) under section 10(38) of the Income Tax Act.
4. Treatment of the transaction as income from undisclosed sources under section 68 of the Income Tax Act.

Summary:

Violation of Principles of Natural Justice:
The assessee contended that the assessment was completed based on alleged statements of third parties without providing copies or an opportunity for cross-examination, violating principles of natural justice as upheld by the Supreme Court in Andaman Timber Industries v. Commissioner of Central Excise and Kishanchand Chellaram v. CIT. However, the Tribunal held that the assessee failed to prove how the non-furnishing of the investigation report or non-production of persons for cross-examination prejudiced them, especially since the statements did not specifically indict the assessee.

Bogus and Sham Transaction of Sale of Shares:
The assessee's purchase and subsequent sale of shares of M/s Sunrise Asian Ltd. were scrutinized. The Tribunal observed that the price of the shares jumped abnormally from Rs. 50 in 2011 to Rs. 615 in 2015 despite the company's negligible profitability and earnings per share (EPS). This pattern indicated that the transactions were stage-managed to plough back unaccounted income as LTCG.

Denial of Exemption of LTCG under Section 10(38):
The Assessing Officer (AO) disallowed the LTCG exemption claimed under section 10(38) on the grounds that the transactions were suspicious and not genuine. The Tribunal upheld this view, stating that the assessee failed to prove the genuineness of the transactions and that the steep rise in share prices was not justified by the company's financials. The Tribunal emphasized that the onus was on the assessee to establish the genuineness of the LTCG claims, which they failed to do.

Treatment of Transaction as Income from Undisclosed Sources under Section 68:
The AO treated the transaction as income from undisclosed sources under section 68, which was upheld by the Tribunal. The Tribunal noted that the assessee's claims were based on documents like bank details and D-Mat accounts, but these were insufficient to prove the genuineness of the transactions. The Tribunal applied the test of preponderance of probabilities and concluded that the transactions were not genuine investments but a colorable device to claim bogus exemptions.

Conclusion:
The Tribunal dismissed the appeal, concluding that the entire transaction was a colorable device to plough back unaccounted income as LTCG and claim bogus exemptions. The AO was justified in denying the exemption under section 10(38) and treating the LTCG as unexplained cash under section 68. The appeal of the assessee was dismissed.

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