Unexplained cash credit under section 68 upheld, section 10(38) exemption denied for bogus penny stock gains

ITAT Kolkata upheld addition under section 68 for unexplained cash credit and denied exemption under section 10(38) for alleged bogus LTCG from penny stock sales. The tribunal relied on precedent cases and found that AO and Commissioner (Appeals) properly applied inferential process considering surrounding circumstances, investigation findings, assessee's conduct, timing between buy-sell operations, and abnormal price rise during market recession. The decision went against the assessee.

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Issues Involved:
1. Treatment of Long Term Capital Gain (LTCG) as bogus.
2. Denial of exemption under section 10(38) of the Income Tax Act, 1961.
3. Addition of unexplained cash credit under section 68.
4. Disallowance under section 14A read with Rule 8D.
5. Addition of interest income from undisclosed sources.
6. Charging of interest under sections 234B and 234C.

Summary of Judgment:

1. Treatment of Long Term Capital Gain (LTCG) as bogus:
The Income Tax Officer (ITO) treated the LTCG of Rs. 68,87,029/- as bogus, considering it unexplained cash credit under section 68 of the Income Tax Act, 1961. The assessee had purchased shares of NCL Research & Financial Services Ltd. at Rs. 2/- per share and sold them at a significantly higher price, resulting in a 13700% increase, which the ITO found suspicious given the company's poor financial performance.

2. Denial of exemption under section 10(38):
The ITO denied the exemption under section 10(38) for the LTCG on the sale of shares, citing that the shares were of a penny stock company involved in providing bogus accommodation entries. The Commissioner of Income Tax (Appeals) upheld this view, relying on circumstantial evidence and ignoring the documentary evidence produced by the assessee.

3. Addition of unexplained cash credit under section 68:
The ITO added the alleged sale consideration as unexplained cash credit under section 68, as the financial statements of NCL Research & Financial Services Ltd. did not justify the steep increase in share prices. The Tribunal upheld this addition, referencing the jurisdictional High Court's decision in the case of Swati Bajaj & Others, which confirmed that such LTCG claims were bogus.

4. Disallowance under section 14A read with Rule 8D:
The ITO disallowed the entire expenses claimed under section 14A read with Rule 8D, incurred for earning taxable income. The Tribunal did not find any infirmity in this disallowance.

5. Addition of interest income from undisclosed sources:
The ITO added back interest received from Indusind Bank as income from undisclosed sources. The Tribunal upheld this addition, noting that the assessee's request to restrict the addition was denied by the CIT(A).

6. Charging of interest under sections 234B and 234C:
The ITO charged interest under sections 234B and 234C of the Income Tax Act, 1961. The Tribunal did not find any error in this charging of interest.

Conclusion:
The Tribunal dismissed the appeals for assessment years 2013-14 and 2014-15, finding no infirmity in the orders of the CIT(Appeals). The judgment was pronounced on 14th September, 2023.

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