Revenue appeal fails as s.68 addition for alleged penny stock gains rejected; genuine capital gains accepted on evidence

HC dismissed Revenue's appeal, upholding ITAT and CIT(A) orders deleting addition under s.68 for alleged penny stock / bogus share transactions. HC held that the assessee had fully discharged the onus under s.68 by demonstrating purchase of shares through the stock exchange, payment by account-payee cheques, transfer and holding in Demat account for over a year, and subsequent sale through the stock exchange with proper contract notes and delivery instructions. Sale consideration was received through banking channels and credited to the assessee's bank account. In absence of contrary evidence, capital gains could not be treated as unexplained cash credits.

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Issues involved:
The appeal challenges the order of the Income Tax Appellate Tribunal (ITAT) rejecting two appeals filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2005-06 regarding long term capital gain treated as unexplained cash credit under Section 68 of the Income Tax Act, 1961.

Issue 1: Addition of long term capital gain as unexplained cash credit

The Revenue contended before the ITAT that the Commissioner of Income Tax (Appeals) was erroneous in deleting the addition made by the Assessing Officer in respect of long term capital gain treated as unexplained cash credit under Section 68 of the Act.

Issue 2: Allegations regarding the transaction

The Respondent had shown sale proceeds of shares in Ramkrishna Fincap Ltd. (RFL) as long term capital gain and claimed exemption under the Act. The Assessing Officer believed the capital gain to be accommodation entries due to the scrip being a penny stock and the involvement of a broker in price manipulation through synchronized and cross deals in RFL shares.

Issue 3: Decision of the Commissioner of Income Tax (Appeals)

The Commissioner of Income Tax (Appeals) deleted the addition made under Section 68 of the Act, stating that SEBI's independent enquiry proved the broker's involvement in inflating the price of RFL shares. The Commissioner found no fault in the Respondent's single transaction with the broker, as the shares were purchased through a registered share broker, payment was made by cheque, shares were transferred to the Demat account, and sold on the Stock Exchange.

Issue 4: Decision of the Income Tax Appellate Tribunal (ITAT)

The ITAT upheld the decision of the Commissioner of Income Tax (Appeals), emphasizing that the shares were purchased on the Stock Exchange, deliveries were taken, contract notes were issued, and shares were sold on the Stock Exchange. The ITAT concluded that there was no merit in the Revenue's appeal.

Conclusion:
The High Court found no fault in the ITAT's decision and determined that no substantial questions of law arose from the appeal. Therefore, the appeal was dismissed.

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