ITAT reverses deletion of bogus LTCG disallowance under section 10(38) for penny stock transactions lacking complete documentation (38)

ITAT Ahmedabad reversed CIT(A)'s deletion of bogus LTCG disallowance under section 10(38) involving penny stock shares. The assessee purchased 55,000 shares of a company but provided complete details for only 5,000 shares despite phenomenal price fluctuations and SEBI investigation. CIT(A) erroneously relied solely on banking channel payments and lack of relationship with the company without considering incomplete documentation and suspicious price movements. ITAT held that case law precedents apply only when assessee provides foolproof evidence of genuine transactions without collusion, which was absent here.

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Issues:
Appeals filed by Revenue against CIT(A) orders for Assessment Year 2012-13 - Disallowance of Long Term Capital Gain under section 10(38) of the Income Tax Act.

Analysis:
In the case, the Revenue filed three appeals against CIT(A) orders dated 06.08.2020 for the Assessment Year 2012-13. The common grounds raised in all appeals relate to the disallowance of Long Term Capital Gain (LTCG) under section 10(38) of the Income Tax Act. The Revenue contended that the LTCG claimed by the assessee from the sale of shares of a penny stock company was non-genuine and bogus. The Assessing Officer made an addition of Rs. 6,76,623 based on the analysis of share price movement and other factors.

Upon appeal, the CIT(A) allowed the appeals of the assessee, leading to the Revenue filing further appeals. The assessee argued that the shares were purchased through a registered broker, and the transactions were legitimate. However, the Revenue contended that the scrip was associated with a company banned for trading in penny stocks by SEBI, indicating irregularities. The CIT(A) did not consider these aspects and allowed the appeals.

The Tribunal, after hearing both parties and examining the material on record, found discrepancies in the assessee's claims. The share price fluctuations of the penny stock in question were not in line with the company's financial health or activities. The Tribunal noted that the assessee failed to provide comprehensive evidence to support the legitimacy of the transactions. Citing various case laws and circulars, the Tribunal held that the CIT(A) erred in deleting the additions and allowed the Revenue's appeals.

Consequently, the Tribunal allowed all three appeals filed by the Revenue against the CIT(A) orders for the Assessment Year 2012-13. The judgments were pronounced on the 8th day of February 2023.

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