Penny stock capital gains claims fail where surrounding circumstances show sham transactions and accommodation entries.

Penny stock long-term capital gains claims were examined against surrounding circumstances, including weak financials, a sharp rise in share price, and investigation material suggesting manipulation and accommodation entries. Documentary evidence such as contract notes, demat records, banking channels and securities transaction tax payment was found insufficient on its own because genuineness had to be tested by human probabilities and the real nature of the transaction. The assessee failed to prove that the gains were genuine, and the arrangement was treated as a pre-arranged sham transaction. The related commission expenditure was viewed as incidental to the accommodation entry. The additions under sections 68 and 69C were upheld, and exemption under section 10(38) was denied.

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Issues: Whether the addition under section 68, the disallowance of exemption under section 10(38), and the addition of commission expenditure under section 69C were sustainable in respect of the assessee's penny stock transactions.

Analysis: The claim of long-term capital gains was examined in the light of the surrounding circumstances, the weak financial fundamentals of the scrip, the extraordinary rise in share price within a short period, and the investigation material indicating manipulation in penny stocks and accommodation entries. The documentary trail such as contract notes, demat records, banking channels, and payment of securities transaction tax was held insufficient by itself, because genuineness of the transaction had to be tested on the basis of human probabilities and the real nature of the transaction. The burden remained on the assessee to establish that the capital gains were genuine, and the circumstances were found to show a pre-arranged and sham transaction. The commission alleged to have been paid for arranging the accommodation entry was treated as a corollary to the main transaction.

Conclusion: The additions under section 68 and section 69C were upheld, and exemption under section 10(38) was denied.

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