Penny stock allegation fails where share trades are backed by banking and demat evidence, and no cogent proof of sham exists.

Addition for alleged penny stock share dealings could not be sustained where the Assessing Officer relied mainly on weak financials and an inference of price manipulation without independent, cogent evidence of the assessee's involvement in rigging or any sham transaction. Banking-channel payments, demat entries and supporting documents substantiated the purchase and sale of shares, and the mere label of a scrip as a penny stock, without further enquiry, was insufficient to deny long-term capital gains treatment or invoke the unexplained cash credit framework. The assessee was therefore entitled to relief.

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Issues: Whether the addition made by the Assessing Officer by treating the share transactions as penny stock dealings and denying long-term capital gains exemption was justified.

Analysis: The addition was based on the company's weak financials and an inference of price manipulation, but no independent or cogent evidence was brought on record to show any role of the assessee in price rigging or any sham transaction. The share purchase and sale were supported by banking-channel payments, demat entries, and other documentary material. On the facts, the mere characterization of the scrip as a penny stock and the absence of a further independent enquiry were insufficient to sustain the addition under the unexplained cash credit framework or to deny the claimed capital gains treatment.

Conclusion: The addition was not sustainable and the assessee was entitled to relief.

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