Penny stock capital gains exemption failed where surrounding facts showed accommodation entry indicators and the transaction lacked genuineness.

Long-term capital gain claims on share sales may be denied where surrounding facts indicate a penny stock or accommodation entry arrangement. In this ITAT Hyderabad note, the Tribunal stated that contract notes, demat entries and bank records alone do not establish genuineness if the transaction is inconsistent with normal commercial conduct and stock-price behaviour. Applying the preponderance of probabilities test, it held that the assessee failed to rebut adverse material from departmental investigation and market patterns. The exemption claim was rejected and the addition treating the amount as unexplained income was sustained.

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Issues: Whether the assessee was entitled to exemption under section 10(38) of the Income-tax Act, 1961 on the long-term capital gain claimed from sale of shares, and whether the transaction was genuine or a bogus penny stock arrangement liable to be taxed as unexplained income.

Analysis: The shares were purchased and sold within a short span at an exceptionally high rise in value, and the surrounding material, including departmental investigation and the stock-price pattern, indicated features commonly associated with accommodation entries and penny stock manipulation. The Tribunal held that mere production of contract notes, demat entries, and banking records does not by itself establish genuineness where the transaction is inconsistent with normal human conduct and commercial probabilities. Applying the test of preponderance of probabilities and the burden on the assessee to prove the claim for exemption, the Tribunal found that the assessee failed to dispel the adverse inference and that the apparent form of the transaction did not reflect its real nature.

Conclusion: The claim for exemption under section 10(38) was rejected and the addition made by the Assessing Officer was upheld.

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