Penny stock capital gains claims can fail on human probabilities and circumstantial evidence, with revision upheld for inadequate enquiry.

Penny stock capital gains claims may be treated as bogus under section 68 where abnormal price movement, accommodation-entry material, and surrounding market circumstances indicate a pre-arranged and manipulated transaction. Documentary proof such as contract notes, demat entries, and banking records did not, by itself, discharge the assessee's burden when human probabilities and circumstantial evidence pointed the other way. The Court also upheld revision under section 263 because the Assessing Officers had failed to make proper enquiry into the genuineness of the exempt capital-gains claims, leaving the assessments both erroneous and prejudicial to the Revenue.

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Issues: (i) Whether the assessees' claims of long-term capital gains from sale of penny stock shares were genuine or liable to be treated as bogus and taxed under section 68; (ii) Whether the Commissioner was justified in invoking section 263 in the connected matters on the footing that the assessments were erroneous and prejudicial to the interests of the Revenue.

Issue (i): Whether the assessees' claims of long-term capital gains from sale of penny stock shares were genuine or liable to be treated as bogus and taxed under section 68.

Analysis: The assessment records showed that the shares were purchased in a company with insignificant business activity and sold after a steep and abnormal rise within a short span, resulting in extraordinary gains or losses. The investigation material concerning penny stock accommodation entries, price rigging, circular trading, and the surrounding market circumstances was treated as relevant foundational material. The assessees relied on contract notes, demat entries, bank channels, and other documentary proof, but the Court held that such papers did not by themselves discharge the burden under section 68 when the surrounding facts, human conduct, and preponderance of probabilities pointed to a pre-arranged and manipulated transaction. The absence of direct evidence against each assessee, non-furnishing of the entire investigation report, and non-production of persons for cross-examination did not vitiate the proceedings because no prejudice was shown and the assessees were not specifically named in the report.

Conclusion: The long-term capital gains claims were held to be bogus and the additions made by the Assessing Officers, as affirmed by the CIT(A), were restored in favour of the Revenue.

Issue (ii): Whether the Commissioner was justified in invoking section 263 in the connected matters on the footing that the assessments were erroneous and prejudicial to the interests of the Revenue.

Analysis: In the section 263 matters, the Court found that the Assessing Officers had not conducted the requisite enquiry into the genuineness of the exempt capital-gains claims in light of the investigation material and the surrounding circumstances. The Commissioner had identified the failure to make a proper enquiry and had explained why the assessments were unsustainable. The Tribunal was held to have interfered on a superficial approach without examining the core factual matrix and the nature of the enquiry expected in such cases. The Court held that the statutory requirements of error and prejudice were satisfied on the facts.

Conclusion: The assumption of jurisdiction under section 263 was upheld and the revisional orders were restored in favour of the Revenue.

Final Conclusion: The Tribunal's common order was set aside, the Revenue's appeals were allowed, and the assessments and revisional orders adverse to the assessees were restored.

Ratio Decidendi: In a section 68 enquiry involving penny stock capital-gains claims, documentary compliance by itself does not discharge the assessee's burden where the surrounding circumstances, investigation material, and human probabilities establish a pre-arranged and manipulated transaction; in such cases, the Revenue may rely on circumstantial evidence and the order can also be revised under section 263 if the Assessing Officer failed to make the necessary enquiry.

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