Genuine share transactions and cross-examination rights defeated penny stock addition under section 68

Contemporaneous contract notes, bank statements, demat records and purchase-sale details supported the genuineness of the share transactions, so the long-term capital gain could not be treated as bogus penny stock income under section 68. The addition failed because the Assessing Officer relied mainly on suspicion and general investigation material without assessee-specific adverse evidence, and the absence of effective cross-examination further weakened the assessment. In these circumstances, the documentary evidence was accepted as sufficient to establish the transaction through registered and banking channels, and the claimed exempt long-term capital gain was sustained.

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Issues: Whether the addition made under section 68 by treating the long-term capital gain from sale of shares as bogus penny stock gain was sustainable, and whether the assessee's documentary evidence and denial of cross-examination required deletion of the addition.

Analysis: The assessee produced contract notes, bank statements, demat/transaction records and supporting purchase-sale details showing acquisition and sale of the shares through registered channels and receipt/payment through banking channels. The record did not show any specific infirmity in these documents, nor did the Assessing Officer bring material to rebut them with assessee-specific evidence. The addition was based largely on suspicion, general investigation material and the assumption that the scrip was a penny stock. The order also proceeded without allowing effective cross-examination of the material relied upon, which affected the fairness of the assessment. In the presence of jurisdictional High Court guidance and factual evidence supporting genuineness, the transaction could not be treated as a bogus accommodation entry merely on surmise.

Conclusion: The addition under section 68 was not justified and the assessee's claim of exempt long-term capital gain was upheld.

Final Conclusion: The revenue's challenge failed because the share transactions were accepted as genuine on the basis of contemporaneous evidence and the impugned addition could not survive on suspicion alone.

Ratio Decidendi: A share transaction supported by contemporaneous banking, demat and contract-note evidence cannot be treated as bogus penny stock income under section 68 in the absence of assessee-specific adverse material, and an assessment founded on mere suspicion and denial of effective cross-examination is unsustainable.

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