Tribunal affirms tax authority's decision on bogus LTCG claim for penny stock sale

The Tribunal upheld the Assessing Officer's addition under Section 68 of the Income Tax Act, deeming the long-term capital gain claim on the sale of shares as bogus due to lack of justification for the steep increase in share price of a penny stock company. Relying on a High Court judgment, the Tribunal dismissed the appeal, emphasizing the failure to provide evidence disproving manipulation or proving the genuineness of the transaction. The LTCG exemption claim was rejected, aligning with the High Court precedent on similar cases.

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Issues Involved:
1. Justification for addition under Section 68 of the Income Tax Act.
2. Legitimacy of Long Term Capital Gains (LTCG) claim on sale of shares.

Summary:

Issue 1: Justification for Addition under Section 68:
The assessee, an HUF, filed a return declaring income and claimed exemption under Section 10(38) for long-term capital gain from the sale of equity shares of Sulabh Engineers & Services Limited. The Assessing Officer (AO) observed that the financial performance of Sulabh Engineers & Services Limited did not justify the steep increase in share price, categorizing it as a penny stock company involved in providing bogus accommodation entries. Consequently, the AO deemed the LTCG claim as bogus and added the sale consideration as unexplained cash credit under Section 68. The CIT(A) upheld this view, leading the assessee to appeal before the Tribunal.

Issue 2: Legitimacy of LTCG Claim on Sale of Shares:
The Tribunal examined whether the LTCG claim on the sale of shares was genuine. The assessee argued that the transaction was legitimate and not manipulated, citing a previous Tribunal decision in a similar case. However, the Revenue countered that the issue was covered by the jurisdictional High Court's judgment in Swati Bajaj & Others, which found such LTCG claims as bogus based on the preponderance of probabilities and surrounding circumstances, such as the steep rise in share prices not commensurate with the companies' financials.

Tribunal's Decision:
The Tribunal relied on the jurisdictional High Court's judgment in Swati Bajaj & Others, which held that LTCG claims from penny stock companies were bogus. The Tribunal noted that the assessee failed to provide evidence disproving manipulation or proving the genuineness of the share price increase. The Tribunal dismissed the assessee's reliance on the Gateway Financial Services Limited case, as it was factually distinguishable and lacked a SEBI order exonerating the assessee.

Conclusion:
Following the High Court's binding precedent, the Tribunal dismissed the appeal, upholding the AO's addition under Section 68 and rejecting the LTCG exemption claim. The Tribunal pronounced the order in open court on 21st September 2023.

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