Long-term capital gains from penny stock sale rejected as unexplained income after AO failed specific findings; ITAT rules for assessee

Addition of long-term capital gain as unexplained income was challenged where AO relied on rapid price rise in a penny stock and general modus operandi but made no specific findings against the assessee. The assessee produced broker bills, contract summaries and bank statements, and continued to hold substantial shareholdings, supporting investor status. The tribunal accepted that documentary evidence and continued investment rebutted the presumption of bogus entry and held the LTCG could not be treated as income under the unexplained income provision, deciding in favour of the assessee.

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Issues: Whether long-term capital gains claimed as exempt under Section 10(38) can be treated as unexplained cash credit under Section 68 and added to income where the assessee transacted in a penny-stock scrip but produced broker notes, Demat entries and bank routing of sale proceeds.

Analysis: The issue involves application of Section 68 (unexplained cash credits) and Section 10(38) (exemption for long-term capital gains) in the context of reassessment initiated under Section 148 based on an investigation report labelling the scrip as a penny stock. Relevant considerations include whether the revenue recorded specific adverse findings against the assessee linking the assessee to price manipulation, whether documentary evidence such as broker contract notes, Demat transfers and bank payments establish the genuineness of purchase and sale, and whether mere classification of a scrip as a penny stock suffices to treat sale proceeds as accommodation entries. The authorities did not record any finding that the assessee participated in rigging or that deliveries and payments were not routed through banking channels; the assessee produced broker notes, Demat account entries, and bank statements and continued to hold remaining shares. The Tribunal applied the principle that absent specific incriminating findings and where documentary and transactional evidence support the investments and sales, capital gains cannot be recharacterised as unexplained cash credits merely because the scrip is identified in an investigation as commonly used for accommodation entries; precedent where similar transactional evidence and Demat/contract-note records led to deletion of additions was followed.

Conclusion: The addition treating long-term capital gains as income under Section 68 is deleted and the appeal is allowed in favour of the assessee.

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